Why I Love Capital Gains (and you should too)
I love long-term capital gains. Sure, there’s the satisfaction of cashing in on an investment (rarer for me than I would like 🙂 ). But it’s more than that. What I really love is knowing that Uncle Sam will be getting a far smaller cut than he gets from my earned income. Yep, in case you didn’t know, U.S. long-term capital gain tax rates are FAR lower—ZERO for millions of taxpayers—than ordinary income rates. (Note: “long-term” means assets held for at least one year.)
2016 Long-Term Capital Gain Tax Rates
From the IRS’s website, here’s quick & dirty look at long-term capital gain tax rates.
As this is written and presented in the IRS’s usual impenetrable style, I’ll translate:
- First, let’s ignore the first three lines. These pertain to circumstances that likely do not apply to 98% of you.
- Now let’s zero in on the last line, just above the footnote, the one with a very enticing 0% in the right column. This is saying that, if your regular (paycheck) income is taxed at 10% or 15%, then any capital gains you notch are totally federal income tax free! That is huge, my friends.
- Look up a line: If your regular income is taxed at 25%, 28%, 33%, or 35%, your long-term capital gain rate is only 15%. That’s pretty cool too!
Who Gets Tax-Free Capital Gains?
Congress has blessed people with incomes up to these maximums with a 0% capital gain rate:
Single: Taxpayers with income under $37,650 pay NO long-term capital gain tax.
Married Filing Jointly: Taxpayers with joint income under $75,300 pay NO long-term capital gain tax.
Married Filing Separately: Taxpayers with income under $37,650 pay NO long-term capital gain tax.
Head of Household: Taxpayers with income under $50,400 pay NO long-term capital gain tax.
Who Pays a 15% Long-Term Capital Gain Tax Rate?
If your income is too high to cash in on that ideal 0% tax rate, then how high can your income be to qualify for the still pleasing 15% capital gain rate? Answers:
Single: Up to $415,050 (wow!)
Married Filing Jointly: Up to $466,950
Married Filing Separately: Up to $233,475
Head of Household: Up to $441,000
And even with income above these numbers, the highest long-term capital gain tax rate is 20% (excluding the special cases noted in the first three lines of the IRS table reproduced above).
How to Earn Capital Gains and Pay Less Tax
So now you’re wondering: Just how do I get more of these long-term capital gains and thereby cut my overall tax rate?
In general, capital gains are achieved when you sell something for more than you paid for it. Stocks, bonds, commodities, precious metals—these are potential capital gain generators. Yep, investing involves inherent risk, and you should not take lightly that risk. But prudent risk-taking consistent with your long-term goals and risk tolerance makes sense. (Use the Free Risk Calculator available through the link in the right sidebar of this page to help get a handle on your risk tolerance.)
An important caveat: Earnings withdrawn from traditional IRAs are taxed at ordinary income tax rates. That means that capital gains generated within an IRA will ultimately be taxed at your ordinary income tax rate at the time of withdrawal, even if some or all of your IRA earnings were due to capital gains.