Paying the Price: A Look at Capital Gains TaxBy Amber McCracken, GHI Blog Contributor
As Tax Season Ends, It’s a Good Time to Plan
Another tax season is in the books! Hopefully, it was a painless process for you. For many, April leads to taking stock in your personal financial picture. Beyond preparing basic income tax information, many have to make decisions about whether to hold or sell personal assets based upon tax implications, particularly if retirement, downsizing, joining a life care at home program or moving to a retirement community is under consideration. The main factor to consider is capital gains tax.
Almost anything you own, whether for personal or investment purposes, may be considered a capital asset. This applies to stocks and bonds, real estate and collectibles. When a capital asset is sold, the difference between the original purchase price of the asset and the sale price of the asset becomes a capital gain or a capital loss. You incur a capital gain if you sell the asset for more than the original price. According to Internal Revenue Service (IRS), a capital gain is classified as short-term if you held the asset for one year or less before selling it; it is considered long-term if you held the asset for more than one year.
The taxation of capital gains has become a hotly debated issue politically. The Tax Foundation, the nation’s leading independent tax policy nonprofit, says “the taxation of dividends and capital gains is one of the most controversial issues in public finance. Relatively high effective tax rates on capital income, particularly that [income] emanating from the corporate sector, have the potential to discourage investment and impede economic growth.”
However, just this week, Bill Gates suggested that an increase in the capital gains tax rate is the simplest and most direct way to target America’s wealth. You can be assured this will be a hot button issue in the 2020 elections.
But capital gains taxes are not just an issue for the wealthy. All Americans, as part of their retirement and financial planning, should take capital gains taxes into consideration.
How are capital gains taxed?
Short-term capital gains are taxed at ordinary income tax rates, but long-term capital gains are taxed at lower rates. The Tax Cuts and Jobs Act of 2017 retained the existing long-term capital gains rates of 0%, 15% and 20%. The rate at which you are taxed will depend on your taxable income:
- 0% applies to individuals with taxable income of no more than $39,375 ($78,750 for married couples filing jointly)
- 15% applies to individuals with taxable income between $39,375 and $434,550 (between $78,750 and $488,850 for married couples filing jointly)
- 20% applies to individuals with taxable income greater than $434,500 (greater than $488,850 for married couples filing jointly)
The Urban Institute & Brookings Institution’s Tax Policy Center also points out that capital losses may be used to offset capital gains, along with up to $3,000 of other taxable income. The unused portion of a capital loss may be carried over to future years.
Special tax considerations
Keep in mind that different types of capital gains are taxed at different rates, typically depending on the asset class for which the gain was incurred. Take real estate as an example, which has special considerations. According to Turbo Tax, if you are thinking of selling your primary home, you may qualify for a tax exclusion if you meet certain criteria:
- You owned the home for a total of at least two years in the five-year period before the sale.
- You used the home as your primary residence for a total of at least two years in that same five-year period.
- You haven’t excluded the gain from another home sale in the two-year period before the sale.
If you meet these conditions, you can exclude up to $250,000 of your gain if you’re single, $500,000 if you’re married filing jointly. This can be beneficial to know if you sell your home to move to retirement community such as one of GHI’s Life Plan Communities (Alexandria or Bailey’s Crossroads), or to downsize and invest in coverage for future care costs through a program such as Goodwin House at Home.
Also, long-term gains on collectibles (defined as items such as coins, stamps, gems, antiques and fine art) are taxed at a maximum 28% rate, and short term gains are taxed as ordinary income.
If you are considering unloading some of your assets before April 15, 2020, there are a number of resources available to help you determine the pros and cons of selling assets. For instance, there are several financial planning services sites with capital gains calculators to help you begin to get a better understanding of where you stand. In addition to these resources, we recommend you and your tax adviser meet with a financial consultant to create and implement a comprehensive tax plan that is consistent with your financial and retirement goals and personal situation.
Amber McCracken is the executive director of Current Communications, a boutique consultancy that helps organizations with their marketing and public relations activities. Amber has worked with GHI since 2014, providing her expert advice to support Goodwin House at Home. She contributes regularly to The Good Life, both as a writer and editor. Amber lives in North Carolina with her husband and two children. She also serves as the caregiver to both of her parents.