In 2012 The American Taxpayer Relief Act raised the top tax rates on qualified capital gains and dividends to 20%.
The tax rate on long-term capital gains is 15% for taxpayers in the 25%, 28%, 33%, and 35% income tax brackets. Taxpayers in the 10% and 15% income tax brackets pay zero tax on long-term gains.
Short-term gains are taxed as income. Currently any gains on investments held one year or less are taxed at your marginal rate.
It is important to evaluate the whole financial picture if you’re thinking of selling an investment for a short-term gain. Potential tax savings may make it worthwhile to hold an investment for at least a year and a day.
Here’s an example that illustrates the magnitude of the rate differential between short- and long-term gains.
If you’re in the 25% tax bracket and you sell a stock you’ve held for 11 months for a $50,000 gain your tax bill for that sale would be $17,500. Your after-tax net proceeds would be $32,500.
If you hold off selling one month and one day later but only realize a $40,000 gain, your net proceeds actually increase by $1,500 to $34,000 due to the lower capital gains rate. By waiting a month it looks like you missed out on an extra $10,000, but in reality you come out $1,500 ahead.
The lesson here is to make sure that you’re looking at the whole picture. Generally if you can hold any stock for at least a year you should.
If you want to take advantage of the lower capital gains rates on long-term appreciating stock, remember that the definition of “long-term” can be subjective. If you’re thinking of holding an investment further into the future, current rates may not apply.
It’s important to always keep an eye on your overall investment goals. Always consider your portfolio balance, your risk tolerance, and whether an investment makes sense in your situation.
If you have any questions about capital gains, or any other tax issues, call Cruise & Associates today for a free consultation.
NOTE: This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation.