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When I said that the current capital gains tax rate is 0% for some taxpayers, a reader, Colin, was shocked. He states:
I had no idea long term capital gains are presently 0%. Are you sure?
Yes, Colin, I’m sure! Let’s take a closer look at capital gains and the capital gains tax rates.
The IRS has a pretty broad view on capital gains, which come from capital assets. Their definition is:
Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
Capital gains taxes are figured when you sell your capital assets. Here’s how it works:
Capital Gains and Losses. When you sell capital assets, if you sell it for more than you paid for it, you have a capital gain; if you sell it for less, you have a capital loss.
Reporting Capital Gains. You must report all capital gains on Schedule D, including investment or personal use property.
Deducting Capital Losses. Capital losses can be deducted on investment property, but not personal use property. Capital losses first offset gains, then are deducted from income. The limit is $3,000 per year; you can carry forward any additional amounts to the future.
Long Term Capital Gains. Capital gains can be classified as long term capital gains if the property is held for more than one year. Long term gains will get preferential tax treatment, including the 0%.
Capital Gains Tax Exclusions. There are some exclusions, one of the most popular of which is your home. You can exclude $250,000 ($500,000 for couples) in capital gains on the sale of your home if you lived in it for 2 of the last 5 years.
The capital gains tax rates for 2013 are:
|Tax Bracket||Short Term Capital Gains Tax Rate||Long Term Capital Gains Tax Rate|
Capital gains are different from dividends, but long term capital gains rates are similar to dividend tax rates for qualified dividends.
Obviously, you do need to be in the bottom two tax brackets to take advantage of the 0% capital gains tax rate. However, if you are close, you may want to do some careful planning and maximize some income shifting and retirement contributions to take advantage of it. Even if you don’t qualify for the 0% capital gains tax, you will still get the lower 15% capital gains tax.
Update: The 2013 capital gains tax rates changed with the Fiscal Cliff Deal.