Tax Tip: Long-Term Capital Gains Taxed at More Favorable Rates

Say you’ve held an investment for one year or less. Any profit from that investment is considered a short-term capital gain, and it’s taxed at your ordinary rate.

But now let’s say that you’ve held that investment for longer than a year – even just one year and one day. All of a sudden, you qualify for long-term capital gain (LTCG) treatment. Which is great news – LTCG tax rates can be as low as 0%.

If you are in the 39.6% tax bracket, your LTCG rate is 20%. If you’re in a tax bracket between 25% and up to the 39.6% bracket, your LTCG rate will be 15%. Finally, if you are in the 10% or 15% brackets, your LTCG rate will be zero.

Tax Bracket

Long-Term Capital Gains Tax Rate

10% – 15%

0%

25% – 35%

15%

39.6%

20%

In 2016, the 15% bracket ended at $75,300 for married couples. So imagine a married couple with $80,000 in taxable income – $70,000 from ordinary wages and $10,000 from a long-term capital gain. Together, their taxable income exceeds the $75,300 limit, but they pay no tax on $5,300 of their capital gain – the point at which the 15% bracket ends. The additional $4,700 in capital gains would be taxed at 15%, the rate of taxation for people in the 25% tax bracket.

But by claiming additional itemized deductions or making a deductible contribution to their IRA in an amount up to or exceeding that $4,700, the couple in the example above would qualify for two tax breaks. They’d get the tax break from their additional deductions, allowing more of their LTCG and Qualified Dividends would be taxed at the 0% rate.

The moral of the story? Hold on to your investments! The favorable tax rate for long-term capital gains makes it well worth the wait.

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