The IRS wants taxpayers to consider investing long-term. That’s why you pay much less on any capital gains if you decide to hold your investments for longer. When you hold your investment for longer than a year, you pay much less.
The IRS announced its inflation-related changes to its tax brackets. Here’s what you need to know to determine which long-term capital gains tax rate brackets you fall into and how to claim a capital gains deduction.
What’s Classified as a Long-Term Capital Gain?
A long-term capital gain is a profit made on a long-term asset when you hold that asset for longer than a year.
If you invested $5,000 in stocks and you sold those stocks for $7,000, your capital gain would be $2,000.
If you held these same stocks for less than a year, this $2,000 would be taxed as ordinary income.
If you hold the stocks for more than a year, you’re taxed at reduced rates. You get preferential treatment.
Tax Brackets for Long-Term Capital Gains
The income thresholds for the long-term capital gains tax brackets were not changed radically since the Tax Cuts and Jobs Act (TCJA). You’ll notice that they look different from the income tax brackets you’re used to.
Here are the three brackets.
0% Tax Bracket – Single filers under $39,375, married and filing jointly under $78,750, and heads of household under $52,750 in income will pay nothing on any capital gains.
15% Tax Bracket – Single filers earning between $39,376 and $434,550. Married but filing jointly taxpayers earning between $78,751 and $488,850, and heads of household earning up to $461,700 will pay 15% on long-term capital gains.
20% Tax Bracket – Anything above the limits will result in the taxpayer having to pay 20% on long-term capital gains.
High-income taxpayers may become eligible for the net investment income tax, which is an additional tax of 3.8% on long-term capital gains.
How Much Could You Save Through Long-Term Capital Gains Tax Rates?
It’s important to understand how much of a difference paying long-term capital gains could make.
For example, Taxpayer X is married, and he files a joint tax return with his spouse. Their combined taxable income is $200,000, which gives them a marginal tax rate of 24%.
Taxpayer X has stock investments worth $10,000 that they paid for 11 months previously. If sold after 11 months, $2,400 would be added to their tax bill. But if they kept it for an additional month, they would reduce their taxes by at least $900 and as much as $1,500.
A simple gain of $7,600 could become a gain of $8,500, depending on whether it’s a short-term or long-term capital gain.
Consider Whether it’s Worth Selling Early
The idea behind long-term capital gains taxes is to encourage taxpayers to invest in long-term assets. Moving in and out of stock positions on a regular basis could prove a bad idea.
That’s why investors must consider whether it’s worth locking in gains early and paying short-term capital gains taxes. Buying and holding is much more attractive under this tax system.
Discover The Benefits of Filing Your Taxes Online
Keep in mind, if you file online, they will ask you the correct questions to help you claim capital gains tax deductions you qualify for and help you pay the least amount of tax possible.