Capital gains tax rates are at historic lows, but they are in the political crosshairs. It’s a good idea to take advantage of planning strategies now.
Capital gains contribute to a taxpayer’s adjusted gross income. An investor realizes capital gains when he sells investments for more than he paid for them; capital losses are the opposite. All of an investor’s capital gains and capital losses are first combined to create a net capital gain or loss. A net capital loss can offset up to $3,000 of other income, with the remainder carrying forward for use in future tax years. Like other income, a net capital gain is subject to tax, though the rate can be different from that which applies to ordinary income.
Currently, while short-term capital gains are taxed at an investor’s ordinary income tax rate (as much as 35 percent), long-term capital gains – those realized from assets held for one year or more – are generally taxed at 15 percent; for investors in the 10 percent and 15 percent tax brackets, the tax on long-term capital gains is zero.
These rates originated in the Jobs and Growth Tax Relief Reconciliation Act of 2003, and President George W. Bush later extended them when he signed the Tax Increase Prevention and Reconciliation Act, in 2006. They were extended again last year as part of the very public legislative struggle that eventually retained many of the Bush-era tax cuts.