Before filing your taxes, learn the recent changes in the capital gains tax rate and strategies to help you save!
Over the past year, the long term capital gains tax rate increased to 20% for those earning over $400,000. Not to mention, high income earners also have an additional 3.8% to the tax rate. Last year, the 2012 capital gains tax rate for most was 15%. That 15% will remain as the current capital gains tax only to those who make $36,250 to $400,000.
In part one of “What is the Capital Gains Tax Rate 2013″, long term capital gains will be defined along with tips on how to avoid paying large long term capital gain tax rates when filing your 2013 taxes. Don’t forget to check out part two of this article, addressing the same for short term capital gains.
What are Capital Gains and Capital Losses?
What you use for personal or investment purposes along with just about everything you own is known as a capital asset. They may be short term or long term capital assets. Capital gains and deductible capital losses are reported on Form 1040, Schedule D. According to the IRS in Topic 409;
“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 a capital loss…You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.”
What are the Tax Rates?
Long Term Capital gains rates 2013 are as follows:
- Income $72,500 or less: 0%
- Income $72,501- $450,000: 15%
- Income $450,001 and over: 20%
- Income of $200,00 for individuals and $250,000, there is the 3.8% surtax (for the Medicare contribution)
Long-term Capital Gains
Long-term capital gains (LTCG) include assets held for more than one year. For example, in most cases, stocks, bonds, mutual fund shares and real estate would be considered a long-term capital gain (or loss).
There are exceptions for the 15% and 20% capital gains tax rate. They are as follows;
- For low-bracket income taxpayers, the long-term capital gains rate is 0%.
- Long-term gains from stock sales by children under age 19 and under age 24 if a student, might qualify for 0% rate from the Kiddie Tax rule.
- Capital gains do not include your primary residency.
Seven Saving Strategies
If you are strategic with your long term capital gains, you won’t end up paying huge tax rates. Here are some strategies on how to save on long-term capital gains tax rates:
- Invest in your residence: If you can, get that new roof put on, fix that kitchen sink, update your home and save all receipts. Why? Single filers can exclude up to $250,000 of gain on their primary residence and couples, $500,000.
- Look at your losses: By listing losses, your capital gains will be offset.
- Give gifts to charity. Giving gifts to charity, you’ll be killing two birds with one stone. For example, by giving appreciated stock to charity, you will have fewer capital gains that are taxed and also will receive a tax deduction.
- Move to a different state: Moving to a tax-friendly state might mean your state capital gains taxes will decrease. For example, states like Florida, Nevada do not have an income tax.
- Open a charitable trust: By opening a charitable trust, you put in $100,000 or more into a trust that pays you a certain income for life and when you die, the remainder goes to a charity. If you open a charitable trust and put your appreciated assets in it, you will avoid large capital gain taxes. In fact, if you fall into a low enough income tax brackets while taking the payouts, you might not even have to pay a capital gains tax!
- Open a 529 College Savings Account: Opening a 529 college savings account allows you to set money aside tax-free and when it comes time to withdraw the money for education expenses, it’s also tax free, meaning you won’t have to pay a capital gains tax.
- Put money into your retirement accounts: Adding money to retirement accounts, IRAs means you avoid paying taxes while the money is in the retirement account.
It’s easy to see there has been a change in long term capital gains tax rate for 2013 taxes. There also has been others changes for 2013 taxes including a change to the start date of the 2014 tax season. Filing your 2013 taxes is delayed this year and won’t start until January 31. The IRS won’t accept returns until the last day of January but on RapidTax, you can start your 2013 online tax return on the first day of January.
Now that you know about long term capital gains, don’t forget part two of this article specifically addresses the rate changes for short-term capital gains.
Photo via Chris Potter on Flickr