If you sell stocks, mutual funds or other capital assets that you held for at least one year, any gain from the sale is taxed at either a 0%, 15% or 20% rate. Those tax rates for long-term capital gains are typically much lower than the ordinary tax rates you'd otherwise pay, which can be as high as 37%.
However, which one of those capital gains rates – 0%, 15% or 20% – applies to you depends on your taxable income. The higher your income, the higher the rate.
The taxable income thresholds for the capital gains tax rates are adjusted each year for inflation. The IRS has already released the 2021 thresholds (see table below), so you can start planning for 2021 capital asset sales now.
Tax on net investment income
There's an additional 3.8% surtax on net investment income (NII) that you might have to pay on top of the capital gains tax. (NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities and royalties.) You must pay the surtax if you're a single taxpayer with modified adjusted gross income over $200,000 or a married couple filing a joint return with modified AGI over $250,000.
(If the Supreme Court completely overturns Obamacare, the 3.8% surtax on net investment income, which includes capital gains, will also be eliminated.)
Will there be changes to the capital gains tax rates?
Depending on the outcome of the 2020 presidential election, we very well may see changes to the capital gains tax rates in the near future. If elected, Joe Biden says he wants to eliminate the favorable tax rates on capital gains for anyone making over $1 million.
President Trump, on the other hand, says he will cut taxes on capital gains if he's reelected. First, look for him to eliminate the 20% rate so that the top tax rate on long-term capital gains is 15%. He has also called for indexing capital gains for inflation, which means you pay the capital gains tax on a smaller amount.
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