When you sell an asset, such as a stock or property, for more than you originally paid for it, you have a capital gain. This gain is typically taxed at a lower rate than ordinary income, but it can still affect your overall tax liability. If the capital gains are substantial, it may push you into a higher tax bracket, resulting in a higher tax bill. Therefore, it’s important to consider the potential tax implications before selling any assets.
Capital Gain and Taxable Income
Capital gains are profits from the sale of assets, such as stocks or real estate. Whether capital gains are added to your total income depends on various factors like individual or business status, holding period of the asset, and the amount of gain.
For Individuals:
- Short-term capital gains (assets held for less than a year) are taxed at the same rate as your ordinary income.
- Long-term capital gains (assets held for more than a year) are taxed at lower rates:
- 0% for gains up to $40,400 for single filers or $80,800 for joint filers
- 15% for gains between $40,400-$452,700 for single filers or $80,800-$523,600 for joint filers
- 20% for gains over $452,700 for single filers or $523,600 for joint filers
For Businesses:
Capital gains are generally treated as business income and taxed at corporate tax rates, which vary depending on the business’s income.
Qualifying for Lower Tax Rates:
To qualify for the lower long-term capital gains rates, you must meet the following conditions:
- Be an individual (corporations do not qualify)
- Hold the asset for more than a year
- Not fall within the top 37% ordinary income tax bracket
Tax Brackets and Capital Gain Inclusion:
| Tax Bracket (2022) | Capital Gain Threshold for 0% Rate (Single/Joint) |
|---|---|
| 10% | $40,400/$80,800 |
| 12% | $40,400/$80,800 |
| 22% | None |
| 24% | None |
| 32% | None |
| 35% | None |
| 37% | None |
As you can see, capital gains are not automatically included in your total income and do not necessarily push you into a higher tax bracket.
Marginal Tax Rate Thresholds
When you sell an asset for a profit, you may need to pay capital gains tax on the profit. The amount of tax you pay depends on your income and the length of time you held the asset before selling it.
Capital gains are taxed at different rates depending on your income. If you are in a lower income tax bracket, you will pay a lower capital gains tax rate. If you are in a higher income tax bracket, you will pay a higher capital gains tax rate.
The following table shows the federal income tax rates for 2023:
| Tax Bracket | Marginal Tax Rate | Income Range (Single) | Income Range (Married Filing Jointly) |
|---|---|---|---|
| 10% | 10% | $10,275 – $41,775 | $20,550 – $83,550 |
| 12% | 12% | $41,775 – $89,075 | $83,550 – $178,150 |
| 22% | 22% | $89,075 – $170,050 | $178,150 – $356,300 |
| 24% | 24% | $170,050 – $215,950 | $356,300 – $431,900 |
| 32% | 32% | $215,950 – $539,900 | $431,900 – $647,850 |
| 35% | 35% | $539,900 – $1,077,350 | $647,850 – $1,295,700 |
| 37% | 37% | $1,077,350 – $1,250,000 | $1,295,700 – $2,591,400 |
| 39.6% | 39.6% | $1,250,000 – | $2,591,400 – |
As you can see, the marginal tax rate for capital gains is the same as the marginal tax rate for ordinary income.
It is important to note that capital gains are not added to your ordinary income. Instead, capital gains are taxed separately at the applicable capital gains tax rate.
Capital Gains Tax Rates
Capital gains are profits made from the sale of assets, such as stocks, bonds, or real estate. These gains are taxed differently from ordinary income, and the tax rates depend on how long you have held the asset.
Short-Term Capital Gains
Short-term capital gains are taxed at your ordinary income tax rate. This means that the gains will be added to your other income and taxed at the same rate.
Long-Term Capital Gains
Long-term capital gains are taxed at a lower rate than short-term gains. The rates are as follows:
- 0% for taxpayers in the 10% and 12% tax brackets
- 15% for taxpayers in the 22%, 24%, 32%, and 35% tax brackets
- 20% for taxpayers in the 37% and 39.6% tax brackets
Net Investment Income Tax (NIIT)
In addition to capital gains tax, taxpayers may also be subject to the Net Investment Income Tax (NIIT). This tax is an additional 3.8% tax on investment income, including capital gains, dividends, and interest. The NIIT applies to taxpayers with modified adjusted gross income (MAGI) above certain thresholds:
| Filing Status | Threshold |
|---|---|
| Single | $200,000 |
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Head of household | $200,000 |
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Hey there, folks! I hope this article has helped shed some light on the question of capital gains and tax brackets. Remember, it’s always smart to consult with a tax professional for your specific situation. Thanks for giving me a read. Be sure to drop by again for more finance-related scoops and insights. Keep your finances in check and stay tuned!