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Capital gains taxes: Proposed increase for the ultra-wealthy, an overview for the rest of us investors

Capital gains tax Scrabble tiles

As the battle over how to pay for the Biden Administration budget continues on Capitol Hill, much of the focus has been on the wealthy. A new annual tax on billionaires' unrealized capital gains is the latest suggestion to help pay for the nearly $2 trillion bill.

Under current law, every property owner, regardless of income, pays tax on assets when they realize a gain from them, usually by selling them. 

This so-called wealth tax, however, would force the ultra-wealthy to pay tax on the value or their holdings, stocks as well as real estate, before realizing the gains.

It would apply to around 700 of the richest people in the United States, specifically those with $1 billion in assets or those who have reported at least $100 million in income for three consecutive years. Projections put the revenue potential at around $200 billion in revenue over a decade.

While you and I don't have to worry about facing this wealth tax, if we have assets, it's a good idea to know how we regular Jane and Jim Taxpayers are taxed on our holdings. Here's a quick refresher.

Lower capital gains tax rates: Under current federal law, the tax rate on capital gains — the money made (gains) from selling investment assets (capital) — typically are lower than the ordinary tax rates (the seven rates that range from 10 percent to 37 percent) applied to earned income, or money made from working.

The three long-term capital gains tax rates of 0 percent, 15 percent and 20 percent. They also apply, since another Bush tax cut change in 2003, to qualified dividends.

And, yes, that 0 percent level is not a typo. For taxpayers who don't make a lot of money but have invested some of what they have, Uncle Sam gives them this special no-tax break.

Which long-term rate you pay on your capital assets' sales profits depends on your income. Those thresholds are adjusted annually for inflation. The Internal Revenue Service should announce changes for the 2022 tax year soon, like possibly this week or early November.

Until then, and for tax year 2021 planning and filing purposes, the table below shows the three capital gains tax rates and the current income brackets to which they apply.

Tax Year
2021

Capital Gains Taxable Income Brackets by Filing Status

Long-Term Capital Gains Tax Rate

Single

Head
of Household

Married
Filing Jointly
or Surviving
Spouse

Married Filing
Separately

0%

$0 to $40,400

$0 to $54,100

$0 to $80,800

$0 to $40,400

15%

$40,401 to
$445,850

$54,101 to
$473,750

$80,801 to
$501,600

$40,401 to
$250,800

20%

$445,851
and more

$473,751
and more

$501,601
and more

$250,801
and more

 

Homes and special capital gains tax situations: While most of us tend to think of stocks and other financial instruments when it comes to capital gains, the tax applies to other assets.

Notably, the sale of real property can produce capital gains taxes. This usually happens when the real estate is held for money making purposes. For those of us, though, our foray into the real estate world is limited to buying our homes.

When we sell our primary residences, the tax code says we don't have to pay tax on all of our profit. Specifically, single home owners can exclude personal home sale profit up to $250,000. The tax-free profit is twice that for married jointly filing home sellers.

You can read more about tax-free home sale profit in my post on 6 popular homeowner tax breaks.

There also are a couple of other special federal capital gains tax rates. A 25 percent capital gains tax applies in cases of unrecaptured section 1250 gain from selling specified real property. The 28 percent rate is for profits from the sale of collectibles and some qualified small business stock.

My post on unique baseball cards and other collectibles has more on these special capital gains tax rates.

Time commitment is key: Finally, note that the lower capital gains tax rates go out the window if you don't hold onto your investments for a long enough time.

You probably noticed earlier in this post the repeated reference to long-term capital gains. This is the designation for assets that you own for more than a year before selling. In these cases — and I emphasize more than a year, not just a year, of ownership — your gains are taxed at the capital gains rates.

But if you sell after owning an asset for 365 days or less, then you'll pay for your short-term gain at your probably higher ordinary tax rate.

So in addition to keeping an eye on how the markets are doing, also pay attention to the calendar.

You also might find these items of interest:

 

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