Over the past year, the capital gains tax rate increased for some tax brackets.
Capital gains tax 2013 changes mostly effects individuals earning an income of $450,0001 and over. For this group, long term capital gains tax rate jumped from 15% to 20% while the short term 2013 capital gains tax rates increased by 4.6%. In 2012, the short term capital gains tax rate was 35%. The current year short-term rate is 39.6%.
In part one of this article, long term capital gains were defined along with tips on how to avoid paying large long term capital gain tax rates. Now, it’s time to discuss short term capital gains and how they relate to filing your taxes.
What are short term capital gains?
A Capital gain is a profit made from selling any asset when the sale price exceeds the purchase price.
Capital gains are taxed differently depending on how long they are held. The capital gains clock begins the day after you acquire the asset until the day you sell it (this includes day you sell it). Depending on how long the capital gain is held for will determine if it falls into the short-term category or long-term.
As mentioned in the first part of this article, long term capital gains are held for more than one year and are usually taxed less than the ordinary tax rate. On the other hand, short term capital gains are capital gains held for one year or less.
Short-term capital gains:
- Held for one year or less
- Taxed just like ordinary income is taxed.
- Taxed depending on your income tax bracket.
- The 2013 tax rate ranges from 10% to 39.6%.
What Forms do I fill out for my capital gains?
Those who have capital gains (or losses) might have to file these forms on their tax return:
What are the tax rates for 2013 Short-term capital gains?
Effective on January 1, 2013, the 2013 capital gains tax rate changed for those making $450,001 and over in income, an increase of 4.6%. It’s also important to note that the tax rates for short-term capital gains are the same tax rates which apply to your ordinary income. The rates are as follows:
- $17,850 Income or less: 10% Tax Rate
- $17,851-$72,500: 15%
- $72,501-$146,400: 25%
- $146,401-$223,050: 28%
- $223,051-$398,350: 33%
- $398,351-$450,000: 35%
- $450,001 and over: 39.6%
Tips on how to save:
In order to avoid paying a lot of short term capital gain taxes, you may want to do some of the following:
- Move to a Tax-Friendly State: Some states don’t have an income tax, meaning your taxes won’t be as high as they would be in a state that does tax. Tax friendly states include Florida, Nevada, Texas, Alaska, South Dakota, Washington and Wyoming.
- Know what you lost: When filing your taxes, be sure to include losses. The losses will offset any gains, meaning a lower tax.
- Hold securities longer: Long term tax rates are smaller than short term tax rates. Therefore, it makes more sense to hold appreciated securities for longer than a year before selling.
If you held an asset for less than a year, it’s easy to see it’s classified as a short-term capital gain (or loss). If the asset was held for more than a year it will be a considered a long-term capital gain (or loss). Both short term and long term capital gains are taxed. Before filing your taxes, it might be a great idea to sit down and assess your specific situation.
When you are ready to file your short-term or long-term capital gains (or losses), RapidTax will help you. Tax season begins on January 31, 2014 but starting on January 1, 2014, you can create an account for your 2013 taxes with Rapidtax and fill in the 2013 online application.
Photo via 401 (K) 2012 on Flickr