2016 Capital Gains Tax Rates

Investing, Investment Taxes, Taxes
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2016 Capital Gains Tax Rates

It’s great when the value of an investment rises, but there’s a side to that success that’s much less exciting: capital gains taxes.

The IRS and many states assess capital gains taxes on the difference between what you paid for an asset — your basis — and what you sold it for. Capital gains taxes can be short-term or long-term, depending on how long you owned the asset. Short-term capital gains tax rates are equal to your ordinary income tax. Long-term capital gains tax rates, which usually come into play on investments you’ve held for longer than a year, are much less onerous; many taxpayers qualify for a 0% tax rate.

Here’s a brief overview of the rates in effect for this year, as well as the income levels that put you into each tax bracket.

↓ See how to minimize your capital gains taxes

Single filers

IncomeTax bracketShort-term capital gains rateLong-term capital gains rate
Up to $9,27510%10%0%
$9,275 to $37,65015%15%0%
$37,650 to $91,15025%25%15%
$91,150 to $190,15028%28%15%
$190,150 to $413,35033%33%15%
$413,350 to $415,05035%35%15%
$415,050 and over39.6%39.6%20%

Married filing jointly

IncomeTax bracketShort-term capital gains rateLong-term capital gains rate
Up to $18,55010%10%0%
$18,550 to $75,30015%15%0%
$75,300 to $151,90025%25%15%
$151,900 to $231,45028%28%15%
$231,450 to $413,35033%33%15%
$413,350 to $466,95035%35%15%
$466,950 and over39.6%39.6%20%

Married filing separately

IncomeTax bracketShort-term capital gains rateLong-term capital gains rate
Up to $9,27510%10%0%
$9,275 to $37,65015%15%0%
$37,650 to $75,95025%25%15%
$75,950 to $115,72528%28%15%
$115,725 to $206,67533%33%15%
$206,675 to $233,47535%35%15%
$233,475 and over39.6%39.6%20%

Head of household

IncomeTax bracketShort-term capital gains rateLong-term capital gains rate
Up to $13,25010%10%0%
$13,250 to $50,40015%15%0%
$50,400 to $130,15025%25%15%
$130,150 to $210,80028%28%15%
$210,800 to $413,35033%33%15%
$413,350 to $441,00035%35%15%
$441,000 and over39.6%39.6%20%

Those in the 10% and 15% brackets pay no tax on long-term capital gains. You can be in highest ordinary income tax bracket — 39.6% — and still pay no more than 20% in long-term capital gains taxes.

Some investors may also owe the net investment income tax, an additional 3.8% that applies to whichever is smaller: your net investment income or the amount by which your modified adjusted gross income exceeds the amounts listed below. For more on this, check out the IRS’ explanation and this Q&A. Here are the income thresholds that might make investors subject to this additional tax:

  • Single or head of household: $200,000.
  • Married filing jointly: $250,000.
  • Married filing separately: $125,000.

How capital gains are calculated

Capital gains taxes can apply on investments, such as stocks or bonds, real estate — though usually not your home — cars, boats and other tangible items. To put it simply, the money you make on the sale of any of these items is your capital gain. Money you lose is a capital loss. You can use investment capital losses to offset gains. For example, if you sold one stock for a $10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains of $6,000.

The difference between your capital gains and your capital losses is called your “net capital gain.” If your losses exceed your gains, you can deduct the difference on your tax return, up to $3,000 per year ($1,500 for those married filing separately).

The chart of capital gains tax rates above applies to most assets, but there are some noteworthy exceptions. Long-term capital gains on so-called “collectible assets” are generally taxed at 28%; these are things like coins, precious metals, antiques and fine art. Short-term gains on such assets are taxed at the ordinary income tax rate.

How to minimize capital gains taxes

It’s clear that whenever possible, you want to hold an asset for a year or longer so you can qualify for the long-term capital gains tax rate, since it’s significantly lower for most assets. But there are several other steps you can take to lower your tax burden:

Exclude home sales

The IRS has a provision that can help homeowners avoid capital gains on home sales, since this is one of the biggest investments most people make. To qualify, you must have owned your home and used it as your main residence for at least two years in the five-year period before you sell it. You also must not have excluded another home from capital gains in the two-year period before the home sale. If you meet those rules, you can exclude up to $250,000 in gains from a home sale if you’re single and up to $500,000 if you’re married filing jointly.

Rebalance with dividends

Dividends are payments you receive for owning stocks or similar investments. They may be taxed similarly to capital gains, depending on whether they’re qualified or nonqualified. What’s the difference? Qualified dividends are from investments held for a certain amount of time and are taxed like long-term capital gains. Nonqualified dividends are taxed like short-term capital gains at the investor’s ordinary income tax rate.

One way to minimize taxes: Rather than reinvest dividends in the investment that paid them, rebalance by putting that money into your underperforming investments. Typically, you’d rebalance by selling securities that are doing well and putting that money into those that are underperforming. But using dividends to invest in underperforming assets will allow you avoid selling strong performers — and thus avoid any capital gains that would come from that sale.


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Use tax-advantaged accounts

These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don’t have to pay capital gains tax if you sell investments within these accounts. Roth IRAs and 529s in particular have big tax advantages. Qualified distributions from those are tax-free; in other words, you don’t pay any taxes on investment earnings. With traditional IRAs and 401(k)s, you’ll pay taxes when you take distributions from the accounts in retirement. If you’re interested in opening an IRA, check out NerdWallet’s list of best IRA account providers.

Carry losses over

If your net capital loss exceeds the limit you can deduct for the year, the IRS allows you to carry the excess into the next year, deducting it on that year’s return.

Consider a robo-advisor

Robo-advisors are online services that manage your investments for you automatically. They often include tax strategy, including tax-loss harvesting, which involves selling losing investments to offset the gains from winners.

The bottom line

Capital gains taxes can add a considerable amount to your tax bill, even if they’re from long-term gains. If you think you may have to pay them, it’s wise to consult an accountant or tax advisor, who can give you tailored advice and information about minimizing the burden.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.