Major changes to federal capital gains tax mean high earners will pay more in 2013
The fiscal cliff deal, officially known as the American Taxpayer Relief Act of 2012 (despite the fact that it was passed in the early hours of 2013) made several radical changes to the tax code that go into effect for the 2013 tax year. One of the most important is the increase in capital gains taxes.
For those new to issues of taxation, the IRS defines a capital gain this way:
Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or capital loss.
There are two different types of capital gains: short-term capital gains and long-term capital gains. A short-term capital gain results from selling an asset held for one year or less. A long-term capital gain results from selling an asset held for longer than one year. This distinction is important because short-term and long-term capital gains are taxed differently.
For 2013 no changes were made to short-term capital gains. They are still taxed as normal income, at rates from 10% to 39.6% depending on your tax bracket.
Some major changes, however, were made to long-term capital gains. Starting in 2013 long-term capital gains and dividends income are taxed at
- 0% if you fall into the 10% or 15% tax bracket. This includes singles filers with incomes below $36,250.
- 15% if you fall into the 25%, 28%, 33%, or 35% tax bracket. This includes single filers whose incomes fall into the $36,250-$400,000 range.
- 20% if you fall into the new 39.6% tax bracket. This includes single people earning over $400,000 and married couples making over $450,000.
Also new in 2013, capital gains income is subject to an additional 3.8% Medicare tax if you are a single filer with an income over $200,000 or a married couple with an income over $250,000.
If you do have a capital gain (or a capital loss) you may have to file the following forms along with your tax return:
These new rules for capital gains are only a sliver of the changes for high earners brought about by the fiscal cliff. Others include a 0.9% Medicare surtax on wages, the phaseout of itemized deductions and personal exemptions, and an increase in the federal income tax rate. They won’t affect the 2012 taxes you need to file now, but you should keep them in mind as you plan for the 2013 tax year and beyond.
Photo via Dave Hosford on Flickr.
Tags: capital gainsThis entry was posted on Wednesday, March 13th, 2013 at 10:36 am and is filed under Tax News, Tax Tips.