Inside: Learn about Capital gain tax (CGT), Short-term capital gain tax, their application, how it is calculated with examples & current capital gain tax rate in USA for tax fillers for year 2023-2024.
As we approach the end of financial year 2023, it’s never too early to start planning for the next year 2024. For many individuals and investors, understanding capital gains tax rates is an important aspect of financial planning. In this blog post, we’ll take a closer look at US capital gains tax rates for the upcoming years of 2023 and 2024.
What is Capital Gains Tax?
Capital gains tax is a type of tax that is imposed on the profit made from selling certain assets, such as stocks, real estate, or other investments. It is calculated by subtracting the purchase price of the asset from the sales price. The resulting amount is considered the capital gain and is subject to taxation.
Capital Gains Tax Rates in USA 2023-2024
The US currently has a progressive tax system for capital gains, meaning that the percentage of tax paid is based on income level. In general, individuals with higher incomes are subject to higher capital gains tax rates.
For 2023-2024, there may be changes to the capital gains tax rates. As of now, there are proposed plans that would increase the top capital gains tax rate from 20% to 39.6% for individuals with incomes over $1 million.
For individuals with incomes below $1 million, the current capital gains tax rates are as follows:
- For short-term investments (assets held for less than a year), the tax rate is based on your regular income tax bracket.
- For long-term investments (assets held for more than a year), the tax rates are as follows:
- 0% for those in the lowest two income tax brackets
- 15% for those in the middle three income tax brackets
- 20% for those in the highest income tax bracket
If you’ve made profits from selling investments like stocks, bonds, or real estate this year, it’s important to understand how capital gains taxes work. These taxes apply specifically to the net profits from the sale of assets held for over a year.
While regular income like wages and salaries gets taxed at standard federal rates, capital gains face different tax rates that can be lower depending on your taxable income. For 2023 and 2024, the capital gains rates remain the same as the previous year with a few adjustments for inflation.
Income Thresholds for 2024
For the 2024 tax year, the income thresholds increased slightly due to adjustments for inflation:
| Taxable Income (Single) | Taxable Income (Married Filing Jointly) | Married Filing Separately | Head of Household | Long-Term Capital Gains Tax Rate |
|---|---|---|---|---|
| less than or equal to $44,625 | $89,250 | $44,625 | $59,750 | 0% |
| $44,625 but less than or equal to $492,300 | $89,250 but less than or equal to $553,850 | $44,625 but less than or equal to $276,900 | $59,750 but less than or equal to $523,050 | 15% |
Highest capital gain tax bracket of 20% are based on conditions given below:-
- Capital gains on section 1202 qualified small business stock are subject to a maximum tax rate of 28%.
- Earnings from the sale of collectibles, like coins or art, may be taxed up to a 28% rate.
- Gains from the sale of section 1250 real property, specifically the unrecaptured section 1250 portion, can be taxed at a maximum rate of 25%.
Explanation:-
Example 1:
John, a single filer, sells stock A after holding it for two years. His total taxable income, including the profit from the sale, amounts to $492,300. According to the table, his long-term capital gain falls into the 15% tax bracket.
Example 2:
Sarah and Tom, a married couple filing jointly, sell a piece of real estate they’ve owned for several years. Their combined taxable income with the profit is $553,850, placing them in the 15% tax bracket for their capital gains.
How to save Capital Gain Tax Smartly in USA 2024
There are several investment and tax-saving strategies that can help reduce your capital gains tax liability in the USA:
- Tax-Advantaged Retirement Accounts
Contributing to tax-advantaged retirement accounts like 401(k)s, IRAs, and Roth IRAs can be an excellent way to minimize capital gains taxes. By investing within these accounts, you can defer paying taxes on any capital gains until retirement when you may be in a lower tax bracket. With Roth accounts, you pay taxes upfront but all future growth and withdrawals in retirement are tax-free, including capital gains. - Tax-Loss Harvesting
This strategy involves selling losing investment positions to offset any realized capital gains you may have incurred. You can use up to $3,000 of capital losses to offset ordinary income each year, and carry forward any remaining losses indefinitely to future tax years. - Hold Assets for the Long-Term
Assets held for over a year are taxed at the lower long-term capital gains rates (0%, 15%, or 20%), compared to short-term gains which are taxed as ordinary income. Holding appreciating assets for over a year before selling can result in significant tax savings. - Donate Appreciated Securities
Instead of selling an asset and realizing capital gains, consider donating appreciated securities like stocks or mutual funds to a qualified charity. You can deduct the full fair market value and avoid the capital gains tax entirely. - Investment Income Buckets
Try to earn income from a blend of asset types taxed at different rates. For example, balance capital gains with some qualified dividends (taxed at the same rates) and tax-exempt municipal bond interest. Managing your income buckets this way can help maximize tax efficiency. - State Income Tax Planning
Some states like Florida, Texas, and Nevada have no state income taxes, which means 100% of capital gains go untaxed at the state level if you live there. Relocating could save significantly for high earners. - Opportunity Zone Funds
These specialized funds allow you to defer taxes on any prior gains invested until December 31, 2026. If the investment is held at least 10 years, you’d also pay no capital gains tax on the profits from the fund.
The strategies above, along with smart timing of investment sales and income realization, can go a long way toward minimizing the capital gains tax bite. You can also consult with a qualified financial advisor and tax professional to help you implement the most suitable approach for your specific situation and goals.
Conclusion
The capital gains tax is an important aspect of investing to consider when making financial decisions. It’s essential to understand how it works and how potential changes to the tax code could affect investments. As with any proposed policy change, there are potential pros and cons to increasing the capital gains tax rate. It’s important for investors to stay informed and consult with a financial advisor to navigate these potential changes in the market. So, it is crucial to continuously monitor and evaluate the impact of these proposed changes on personal investment