This is a simple-sounding question that can be, in the real world of tax planning, very hard to answer. The simplest calculation is that, in 2020, under the just-released tax tables, single taxpayers will pay 0% capital gains taxes if their adjusted gross income is $40,000 or below, while joint taxpayers will pay 0% below $80,000 of adjusted gross income. After that, the 15% rate kicks in up to $441,451 (single) or $496,601 (joint). Above those income thresholds, taxpayers would pay at a 20% rate.
But of course it is never that simple. You may also be subject to the net investment income tax, or NIIT, which adds 3.8% to the tax on your overall investment income—that is, the combination of all capital gains, plus interest, dividend, rental or royalty income. People have to add this tax if their modified adjusted gross income (their adjusted gross income plus their tax-exempt muni bond interest) exceeds $200,000 (single filers) or $250,000 (joint filers)—or, alternatively, if their net investment income surpasses those thresholds.
But those rates, complicated as they may be, apply only to traditional investments, like stocks, bonds, mutual funds and ETFs. Long-term gains on depreciable real estate investments are set at a maximum federal rate of 25%—plus the NIIT if applicable. It’s actually more complicated than that: if you sold a rental house for a $100,000 gain, after claiming $40,000 of depreciation deductions, the first $40,000 of the gain would be taxed at a 25% capital gains rate, and the remaining $60,000 would be taxed at 20%. The NIIT would be added on if you exceeded the thresholds in the previous paragraph.
And there’s more. If you’re selling collectibles like artwork, coins or stamp collections, or precious metal coins, bullion or precious metal ETFs, the maximum federal rate on long-term gains is 28%.
What about short-term capital gains? Those are taxed at the more complex ordinary income tables, with 10%, 12%, 22%, 24%, 32%, 35% and 37% rates.
There are ways to offset some of the capital gains tax you may incur with charitable giving, through either regular individual giving or by using a donor-advised fund (DAF). For example, you can donate highly appreciated securities. By giving stocks or other securities that have appreciated in value, you can receive an income tax deduction and bypass capital gains taxes on the amount that the security has increased in value. Let’s say you gave $5,000 worth of stock on which you had paid $2,000. You’d receive a $5,000 charitable tax deduction and owe nothing on the $3,000 capital gain. That would result in a savings of $450 in federal tax at the 15 percent capital gains tax bracket, plus any state taxes owed on the capital gain.
Capital gains and taxes are a complex financial topic that effects many investors. We encourage you to work with a financial advisor at Kendall Capital and your tax professional to guide you through the process.