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Capital Gain Rates/Loss Carryforwards

Friday, January 05, 2018
Analyzing the values of your capital assets could result in a multitude of tax savings. As many of you are aware, capital gains are taxed at different rates depending on the holding period of such assets. If you hold the capital asset one year or less, your capital gain or loss is short-term. If you hold the capital asset for more than one year before you dispose of the asset, your capital gain or loss is classified as long-term. Short-term capital gains are taxed at your ordinary income rater, which can be as high as 39.6 percent under our current tax system. However, the Trump/GOP Tax Reform Framework proposes a reduction in ordinary income tax rates. net capital gains, the amount by which your net long-term capital gain for the year exceeds your short-term capital loss for the year, are currently taxed at a maximum rate of 15 percent for taxpayers in the 25 to 35 percent ordinary income tax brackets. If you are in the 10 percent  or 15 percent ordinary income tax brackets, some or all of your net capital gain will be taxed at 0 percent. High-income taxpayers with taxable income exceeding $470,700 for married taxpayers filing jointly and $418,400, for single taxpayers are subject to a 20 percent rate on net capital gains. The Trump/GOP Tax Reform Framework also proposes a top rate of 15 percent on net capital gains. Lastly, a 3.8 percent tax on net investment income applies to taxpayers with modified adjusted gross income (MAGI) that exceeds $250,00 for joint returns and $200,000 for single taxpayers. For certain high-income taxpayers, the top net capital gains tax rate may be as high as 23.8 percent with the inclusion of the 3.8 percent net investment income tax. 
 
Below are a few additional exceptions where capital gains may be taxed at rates greater than 15 percent:
 
  • The taxable party of a gain from selling Section 1202 qualified small business stock held for more than five years is taxed at a maximum 28 percent rate.
  • Net capital gains from selling collectibles are taxed at a maximum 28 percent rate.
  • The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25 percent rate.
When considering tax saving strategies, it is important to remember that capital losses can only be used against capital gains, and you may only use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income. Any loss in excess of $3,000 in the current year will be carried forward to later years. It should be noted that your long-term capital losses will offset long-term capital gains before they offset short-term capital gains, and short-term capital losses will offset short-term capital gains before they offset long-term capital gains. In the event that you have both net short-term losses and net long-term losses, the net short-term losses are used against ordinary income before the net long-term losses are utilized.
 
In many cases, matching up gains and losses can save you taxes. For example, suppose you realized $20,000 in capital gains in the current year and are holding investments on which you have lost $20,000. With proper tax planning, you may be able to sell the investments at a loss to "absorb" the gains completely. If you wait to sell the investments at a loss next year, you will be fully taxed on this year's gains and will only be able to deduct $3,000 of your losses (if you have no other gains next year against which to net the losses). Another strategy would be to isolate short-term gains against long-term losses. Using the amounts above, assume you have $20,000 in short-term gains in the current year, as well as $20,000 in long-term losses. You are holding other long-term investments that have an unrealized gain of $20,000, but you have not sold these investments yet. If you decide to sell the long-term investments in the current year, they will be netted against the long-term losses and leave you with $20,000 in short-term gains to be taxed at your ordinary income tax rate. On the other hand, if you wait to sell the investments in the following tax year, the $20,000 in long-term losses will absorb the entire $20,000 of short-term gains resulting in $0 tax in the current year, and you will benefit from the preferential long-term capital gain rate on the $20,000 investment sold in the following year.
 
As indicated above, careful planning of your capital gains and losses can save you a substantial amount of tax. To learn more about Capital Gain Rates/Loss Carryforwards, call Claire Adkins at (318) 429-2096 or email cadkins@hmvcpa.com. For more information on the services available to you by Heard, McElroy & Vestal, LLC, call our Shreveport office at (318) 429-1525, our Monroe office at (318) 388-3108 or visit www.hmvcpa.com.
 



Author : Claire Adkins, CPA, Tax Manager