July 15, 2024

2023 and 2024 Capital Gains Tax Rates: What’s Changing?

Oh, taxes! Just when you think you’ve got them figured out, the rules change. And if you’re an investor, understanding the ins and outs of capital gains tax rates is crucial. The IRS has made some adjustments for 2024 that you need to be aware of. But don’t worry, we’ve got you covered. Let’s dive into the nitty-gritty of 2023 and 2024 capital gains tax rates and how they’ll impact your financial plans.

 

What Are Capital Gains?

Before we get into the changes, let’s quickly recap what capital gains are. When you sell an asset for more than you paid for it, that profit is called a capital gain. Simple, right? These gains are taxed, but the rate you pay depends on how long you held the asset.

Types of Capital Gains

  • Short-term Capital Gains: Assets held for one year or less. Taxed as ordinary income.
  • Long-term Capital Gains: Assets held for more than one year. Typically taxed at a lower rate.

2023 Capital Gains Tax Rates

Capital Gains Tax RateSingle (Taxable Income)Married Filing Separately (Taxable Income)Head of Household (Taxable Income)Married Filing Jointly (Taxable Income)
0%Up to $44,625Up to $44,625Up to $59,750Up to $89,250
15%$44,626 to $492,300$44,626 to $276,900$59,751 to $523,050$89,251 to $553,850
20%Over $492,300Over $276,900Over $523,050Over $553,850

Source: IRS. Short-term capital gains rates for 2023 apply to sales of assets you have held for a year or less and are the same as your current federal income tax rate.

 

2024 Capital Gains Tax Rates: What’s New?

Now, let’s talk about 2024. The IRS has made some tweaks, primarily adjusting income brackets for inflation and introducing a new surtax.

Adjusted Income Brackets

Capital Gains Tax RateSingle (Taxable Income)Married Filing Separately (Taxable Income)Head of Household (Taxable Income)Married Filing Jointly (Taxable Income)
0%Up to $47,025Up to $47,025Up to $63,000Up to $94,050
15%$47,026 to $518,900$47,026 to $291,850$63,001 to $551,350$94,051 to $583,750
20%Over $518,900Over $291,850Over $551,350Over $583,750

Source: IRS. Short-term capital gains rates for 2024 cover investments you buy and sell within 1 year or less and are equal to your current federal income tax rate.

New Surtax for High-Income Earners

Here’s where it gets interesting. The IRS has introduced a 3.8% surtax on investment income, including capital gains, for those with modified adjusted gross income (MAGI) above certain thresholds:

  • $200,000 for single filers
  • $250,000 for married couples filing jointly
  • $125,000 for married couples filing separately

 

Impact on Investors

So, what does all this mean for you?

Higher Tax Liability for Some

If you’re a high-income earner, you’re likely to see an increase in your tax bill due to the new surtax. Long-term capital gains could now be taxed at up to 23.8% (20% base rate + 3.8% surtax).

Potential Savings for Others

For lower and middle-income taxpayers, the adjustment of income brackets might actually reduce your overall tax liability. By pushing the thresholds higher, fewer people will find themselves in the higher tax brackets.

Strategic Tax Planning

  • Harvesting Losses: Sell underperforming investments to offset gains.
  • Tax-Advantaged Accounts: Utilize IRAs and 401(k)s to defer or avoid capital gains taxes.
  • Timing Asset Sales: Plan the sale of assets to align with years when you’re in a lower tax bracket.

Things to Remember About Capital Gains Taxes

One important aspect of capital gains taxes is that they aren’t automatically deducted from your profits. Instead, any gains or losses you incur throughout the year are typically reported by your brokerage on Form 1099-B.

Moreover, don’t forget that most states impose their own taxes on capital gains. The approach varies: some states tax these gains at their regular income tax rates, while others may tax long-term gains at a reduced rate or even offer deductions or credits. There are also a few states that don’t tax capital gains at all. To get a clearer picture of your specific situation, it’s wise to consult a tax advisor about your state and local capital gains tax rates.

FAQs

1. What are capital gains?

Capital gains are profits from the sale of an asset, such as stocks or real estate, and they’re subject to taxation.

2. How are short-term and long-term capital gains taxed?

Short-term gains are taxed as ordinary income, while long-term gains are taxed at lower rates.

3. What changes are coming to capital gains tax rates in 2024?

The IRS has adjusted the income brackets for inflation and introduced a new 3.8% surtax on high-income earners.

4. How can I minimize my capital gains tax liability?

Consider harvesting losses, using tax-advantaged accounts, and timing your asset sales strategically.

 

Keeping up with tax changes can feel like a full-time job, but understanding the 2024 capital gains tax rates and how they differ from 2023 can save you money and headaches. By staying informed and planning strategically, you can minimize your tax burden and make the most of your investments.

For more detailed information, check out the IRS Tax Topics on Capital Gains and Form 1041-ES.

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