A New Era in Capital Gains Taxation

3/4/2013 - By Lisa Fairbanks, CPA

Pre 2013

Capital gains and dividend taxes used to be simple.  You have a "capital gain" when you sell an investment at a price higher than your purchase price.  Capital gains, held over one year, and dividends were taxed at a maximum 15% rate for most taxpayers.  Those taxpayers in the 15% or 10% tax brackets had an even better rate of zero.  No other taxes. Period.

 

Post 2012

Maybe now the "C" in capital gains should be for "confusing."  Due to the Patient Protection and Affordable Care Act, also known as Obama Care, there is a 3.8% Medicare tax on capital gains, dividends, and other investment income when adjusted gross income (AGI) exceeds $200,000 for single filers or $250,000 for joint filers.  The additional tax is the lesser of the net investment income (including capital gains and dividends) or the excess over the AGI threshold.

The American Taxpayer Relief Act of 2012 added a new higher tax rate for capital gains and dividends.  If your AGI exceeds $400,000 for single filers or $450,000 for joint filers, the capital gain and dividend rate is 20%.  For example, if joint filers have $375,000 of ordinary income and a $100,000 net capital gain; the first $75,000 capital gain is taxed at 15% and the remaining $25,000 is taxed at 20%.  Of course, don't forget the extra 3.8% Medicare tax which makes the highest rate 23.8% for those taxpayers!

These tax increases can be harsh.  We can help you planning your capital transactions to minimize the impact of these new taxes. Let your Saltmarsh tax professional be of service, call (800) 477-7458 today.

-Lisa Fairbanks, CPA

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