What Are the 2013 Capital Gains Tax Rates?

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Just want the rates? Click here for the complete tables of capital gains tax rates including the new 3.8% medicare surcharge, with examples.

There are several new tax laws and provisions to be aware of as we head into 2013 tax season, but one of the most important ones is the change that is taking place when it comes to capital gains tax rates.

Due to new fiscal cliff legislation, capital gains & dividend tax rates are increasing from 15% to 20% for singles earning over $400,000 and couples earnings over $450,000.  Additional changes include:

  • Individuals making in the $36,250 to $400,000 range will see their capital gains continue to be taxed at a 15% tax rate.  Meanwhile, earners in the lowest two income tax brackets will pay 0% on investment income.
  • There will also be an additional 3.8% investment income tax applied to singles earning over $200k and couples earning over $250k.  The purpose of this new tax is to help fund Medicare.

How To Minimize Capital Gains Taxes

Capital gains taxes can be minimizes in two major ways:  by investing for a long time – and a very long time.  If you invest for over a year, your capital gains become “long-term” rather than “short-term” and are taxed at the lower long-term capital gains rate.  Short-term capital gains are typically taxed at the higher short-term rate.  If you really want to minimizing taxes, invest for the very long term in assets with low dividend yields.  Taxes are incurred when assets are sold or dividends are received, so by holding an asset for many years and minimizing dividends you are effectively deferring taxes for many years.  By deferring taxes, your investment is able to compound more quickly, just as it would in a tax-advantaged account like an IRA or 401(k).

This tax-minimization strategy requires holding positions for long periods.  To do so, you’ll want an investment account with a brokerage that will be around for a long time.  You will also want to have access to quality fundamental company research so that you can invest carefully up front, since changes later will incur taxes.  NerdWallet recommends the following brokers because of their long-established reputation and their access to the highest quality research:

  • TD Ameritrade – With over 5 million customers, TD Ameritrade is one of the best established brokerages in the country.  The company is know for customer service and access to top tier research.  Stock trades cost $9.95 and the company provides free access to over 2,500 no-transaction-fee mutual funds.
  • E*trade – With almost 3 million customers and over 20 years in business, E*trade has built a reputation for excellence in trading platforms.  The company offers over 1,300 no transaction fee mutual funds, $9.99 trades, and free access to fundamental company research.
Capital gains taxes can also be minimized by taking advantage of tax-advantaged investment options like retirement accounts.  For more information on IRA, check out the NerdWallet list of the best Roth IRA account providers of 2013.

 

What Are Capital Gains?

The IRS defines capital gains and losses as such:

“Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss.”

Put simply, the money you make on any investment is your capital gain – while any money you lost would be your capital loss.

In terms of the tax paperwork needed to file in 2013, the IRS further explains:

“Capital gains and deductible capital losses are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, and on Form 8949 (PDF), Sales and other Dispositions of Capital Assets. If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates.”

There are many exceptions to these general guidelines, so always be sure to consult a certified tax professional for any specific advice.

Why Are Your Investments Taxed?

Almost all countries tax capital gains to provide an additional source of national revenue.  In the U.S., most capital gains are taxable by the IRS, giving the government a portion of any profits you make when you successfully invest.  Though it varies widely by country, in the U.S. our net annual capital gains are what get taxed, as well as dividends.

This is one of the reasons that an individual retirement account (IRA) is such an appealing option for investors saving for retirement; they can invest money in a tax-advantaged account such that the profits they earn over time become tax free during their life time.  While the details vary by the type of tax-advantaged account you select, these are on the whole a very effective money management strategy because your money avoids high tax rates as it grows.

What If Your Investments Lost Money This Year?

Worried about how to file if your investments lost money this year?  Don’t fear – you can use your capital losses to offset your gains, thereby potentially affecting the rate at which you are taxed.  If you sold your investment at less than the purchase price you paid for it, you may be eligible here.

To get started, check out IRS Form 8949 and Form 1040 (Schedule D) to accurately recording your capital gains and losses.

For more details on how the new tax rates apply to you, visit NerdWallet’s comprehensive guide to 2013 investment tax rates.

Additional Tax Day Resources:

See also: Interested in learning how to invest, or ready to get started?  Check out NerdWallet’s picks for the best online brokerage accounts for new and experienced investors alike.

by Susan Lyon

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  • pdog

    I put my money at risk and they want a cut of that. what a piece of crap.

    • puma

      all income should be taxed the same whether it’s from gambling (capital gains and dividends) or from labor

      • Anonymous

        Gambling and Investing are two completely different things. With gambling – the more you do it. the more statistically likely you are to lose! With Investing, it’s just the opposite. Of course, if you are a complete financial illiterate (and an Obama voter)…then it’s gambling…and you should lose your money.

      • MGmary

        Capital gains are mostly caused by inflation, so it isn’t really fair to tax them at all. Dividends were subject to corporate income tax before they were paid out to the stock holder, so any tax the recipient pays is actually a double tax.

        • Hiroux

          Corporations are treated as fictional people for the purposes of taxation and limited liability. That’s their whole purpose.

        • Dan Chrisman

          Taxes on dividends are paid by the corporate entity that declares a dividend on the their stock. They are taxed at that time and the corporation pays tax on that. Then the dividends are paid to the share holders and that is dividend income to the shareholder who then is responsible to pay tax on it. There is no double tax. It is a single tax paid by the corporation on a dividend declared and paid and a single taxed paid by the individual shareholder who received the dividend as that is taxable income. Two single taxes paid by two different entities. So therefore no recipient is paying a double tax. Single tax only.

          • Dan Chrisman

            I am unsure as to why people believe that when a corporation pays tax on income and then after that fact choose to declare a dividend and pay this dividend out that anyone holding their stock that receives it should not have to count it as individual income and pay taxes on it as an individual to which they are legally obligated to due as that is the law? The company and the individual are separate and earn separate income to which they are responsible for under the law. How people are not understanding that or how they want to deny these two examples are separate entities not only in reality but also separate in consideration with tax law baffles me? How is a company that you own stock in and you considered one earner and one tax payer?

    • http://kevinelliott.net/ Kevin Elliott

      And if you receive a loss, they offer you a discount on what you already owe. Pretty fair.

      • MGmary

        you can only deduct $3000 per year in loses against ordinary income.

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  • Sunny

    I am on a work visa in USA from last 8 yrs. I bought a residential property in India more then 5 yrs back and plan to seel it. My annual income is around $80,000. I have not lived in that property at all as I live in US in a rented place. Now, will I owe capital gain tax in the USA for the gain I make in the sale of my property?

    • Fevon

      Yes..because you are a US citizen, the government forces you to share your “gain”: if you gain, the government gains…if you lose, the government loses, too.

  • Sammy5

    I wish to sell my home and am of full retirement age, will be collecting Soc Sec and still working part-time as of June 1, 2013. I have rented out 50% of my home since 1992. If I understand correctly, if my total taxable income (income after deducting 401K contribution, standard deduction, and any rental expenses and depreciation) is less than 36,250 on my 2013 income tax, I will fall into lowest two tax brackets for Capital Gains and will pay “0” on investment income from the sale of the 50% of my home that I rented for years. Sale price of home 275,000 to 300,000. I understand the other 50% of my home sale is tax free as there is up to a $250,000 standard “no tax” deduction for a “single” filer. Is my thinking correct? Can I deduct expenses and depreciation of rental from my gross income to arrive at a figure less than 36,250? Thanks for your informative website.

    • Maxime Rieman

      I’m sorry, but Susan is no longer available to provide an answer to your question. If you would like free advice and an answer from an RIA, please try our Ask an Advisor service here:
      http://www.nerdwallet.com/finance/question
      Or, if you would like an answer from a member of NerdWallet’s Investing team, please let me know in a comment below.

      Thanks.

    • MGmary

      I believe you will have to recapture past years depreciation as ordinary income on the rental portion

      • gfulmore

        I agree. If you have written off taxes via depreciation, then you need to get taxed on that on the way out. You probably would have been better to rent, but not depreciate. That way, there would not be any capital gains on the way out, unless your gain was more than $250K. But the depreciation payback is different from capital gains anyway.

        • uds0

          It would be nice to have the option of not depreciating, but the code is pretty specific that depreciation will be assumed by the IRS whether you actually take it or not!

  • TOM

    If I cash in stocks that were “given to me” what would the capital gain tax be.

    • MGmary

      You need to know what the person who gave the stock to you paid for it. This is your basis. Subtract that from the sales price and pay tax on the difference.
      If you inherited it, the basis is the value of the stock the day the person died.

  • SandLH

    I will sell my company. The following example could be reality, I have 1 million as a cost basis of starting and keeping the company going and I could end up selling for 10 million. So I have a 9 million gain, although the period of time to get paid this could be over a few years. Is it possible to avoid capital gains if the “gain” is invested immediately into something else for the long term? The 9 million then becomes income to someone or something else so I would guess they would be taxed on it depending on what they do, or is this just where the government essentially does a double taxation of sorts?

    • Maxime Rieman

      I’m sorry, but Susan is no longer available to provide an answer to your question. If you would like free advice and an answer from an RIA, please try our Ask an Advisor service here:
      http://www.nerdwallet.com/finance/question
      Or, if you would like an answer from a member of NerdWallet’s Investing team, please let me know in a comment below.

    • zuma53

      No, you may no “rollover” your gains into another investment without paying the appropriate taxes on your gains. Upon selling, you will be given the proceeds, in cash, for whatever you wish to do with it. So then if you decide to invest in something else, this is a separate transaction, hence the taxability.

      However, if the buyer of your asset trades you your company for the asset that you would have later invested into, since no money traded hands, this would be a tax-free transaction. However, this is rarely the case, so it would be very unlikely for you to find yourself in such a situation. Large corporate transactions are typically done this way to avoid the aforementioned taxes.

    • MGmary

      The only way to avoid cap gain tax would be to do a 1031 like kind property exchange.
      Look up IRS code section 1031 for the details.
      The properties have to be almost identical and of equal value.
      I’m a farmer, I can swap a bull for a bull of equal value, but I can’t swap a bull for a cow of equal value.
      You can swap a rental house for another rental house of equal value, but if one is in a resort area and the other isn’t, you can’ do it.

  • Annie

    We (a couple filing jointly) sold a land parcel for 161,000.00 in 2013 that we had owned for 34 years, never had an income from it, and are retired with an income of 35000.00. What will our capital gains rate be? Thanks for any help you can give me.

    • Maxime Rieman

      Hi Annie,
      I’m sorry, but Susan is no longer available to provide an answer to your question. If you would like free advice and an answer from an RIA, please try our Ask an Advisor service here:
      http://www.nerdwallet.com/finance/question
      Or, if you would like an answer from a member of NerdWallet’s Investing team, please let me know in a comment below.

    • MGmary

      I am not a professional tax adviser but I believe what you need to do is subtract what you paid for the property from the selling price, you may also subtract he cost of the sale ( fees to lawyers or real estate brokers etc) and the federal tax will be 15% of the difference. You may also owe state income tax on this amount.
      IF you paid $55,000 for the property and paid a $6,000 real estate commission you would have a $100,000 capital gain and owe $15,000 in cap gain taxes

  • http://tomazz1.wordpress.com/2014/03/08/tax-planning-for-pfics-and-cfcs-and-fatca/ Thomas Azzara

    The Capital gains tax is zero for offshore foreign bankers in tax havens like the Cayman Islands and Bermuda.

    Foreign banks in tax havens have an unfair advantage over the
    American taxpayer, and it isn’t just and it isn’t fair.

    I’ve filed a FBAR since 1995 – with signature authority over Financial account of an offshore company. No IRS problems yet!
    If you plan Carefully, and file 8621 for a (“few”) pedigreed QEFs, you can reduce your tax Liability on short term and long term capital gains (just like the offshore Foreign banks in tax havens do and have done for over 40 years) and other SubPart F type income (section 954(a) to a low rate of .5%. Of course the Offshore foreign banks still pay NOTHING (0%) under the unusual US Tax Code on the capital gains receive on US investment, but 1/2 of 1% (with 2 pedigreed QEFs) Tax on capital gains is no so bad.

    http://tomazz1.wordpress.com/2014/03/08/tax-planning-for-pfics-and-cfcs-and-fatca/

    Foreign banks in tax havens use deceit, subterfuge, camouflage, concealment to hide US taxpayer accounts, who often trade in so called “Street name” and file a
    W-8BEN with the banker.

    Now, under FATCA, foreign bankers will be reporting American securities accounts in obstruction to the host country’s own bank secrecy and confidentiality laws.

    Very unjust to American tax planners and US investors. Congress does nothing to level the playing field generally speaking. See link above. It may be one of the few avenues left for the American taxpayer.

    “Avoidance of taxes is not a criminal offense. Any attempt to reduce alleviate taxes by legitimate means is permissible. The distinction between evasion and avoidance is fine yet definite. One who avoids tax does not conceal or misrepresent. He shapes events to reduce or eliminate tax liability and upon the happening of the events makes a complete disclosure.

    Evasion on the other hand involves deceit subterfuge camouflage concealment someattempt to color or obscure events or making things seem other than what they are.” — Internal Revenue Service

  • Tammy

    We are thinking about selling our rental property which will mostly result a Net gain of $200K. How much (tax rate%) should we be estimating to pay for income taxes? We have a combined income of $240K.

    • EUOLIGARCHY

      About 30% if you do nothing but take gain immediately — sorry, but it’s going to hurt.