As we’ve already covered, Americans have to pay a lot of different types of taxes. This includes capital gains taxes, which are owed on something you’ve bought and then sold later at a profit. This includes anything you’ve invested in, like a home purchase or stocks that have gained in value.
How do capital gains taxes work?
Capital gains taxes are owed for the tax year when you sell your investment, and the amount owed will vary depending on your income level. Plus, there are both short- and long-term capital gains taxes. If you sell an investment after owning it for a year or less and make a profit, you’ll owe short-term capital gains taxes, and if it’s been more than a year and a day, you’ll owe long-term capital gains taxes.
The three current tax rates for long-term capital gains are 0%, 15%, and 20%. So if your income is low enough, you may be able to sell investments and owe $0 in taxes on your gains. Long-term capital gains taxes have the lowest rates in the U.S. currently.
Short-term capital gains taxes, on the other hand, are tied to the ordinary income tax brackets. These are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. So as you can see, it pays to hang onto investments for longer than a year and a day, to save on the amount of taxes you’ll pay.
Dealing With Capital Gains Taxes Requires Strategy
Different types of gains are taxed differently, and they’re also taxed in different ways. For example, if you’ve got a tax-advantaged retirement account, like an IRA or 401(k), you’ll be charged income tax on withdrawals in retirement. But if you have a regular brokerage account, you’ll be taxed on gains when you sell investments at a profit.
The rules for selling a home and dealing with capital gains taxes are a little different. If you sell a home and you’ve lived there for at least two years out of the last five before selling, you can avoid paying taxes on the first $250,000 you’ve made on the sale if you’re single and $500,000 if you’re married and file taxes jointly with your spouse. The rules are different if you’re dealing with rental property, as that constitutes operating a business.
A good rule of thumb is to hang onto investments for at least a year and a day, or at least two years if it’s a home you’re dealing with. It helps to approach taxes of all kinds with strategy and input from a Certified Financial Planner and a tax professional. They’ll be able to help you figure out the best time and ways to sell investments of all kinds. It’s especially crucial to talk to professionals if you’re dealing with employer stock options, collectibles, and other more complicated investments.