We're less than a month away from the filing deadline for 2013
taxes. With the stock market up 30% in 2013, you likely have some
capital gains if you owned mutual funds or sold any stocks during
the year. There were some big changes between 2012 and 2013 for
the capital gains tax rate, and we're here to help you determine
the most important things to know and the big increase for top
The short-term rate for 2013 and 2014
Short-term capital gains -- that is, gains on shares held less
than a year -- are taxed as normal income. As such, the only
change was for taxpayers with more than $400,000 a year in
income. Those taxpayers saw the introduction of a seventh tax
bracket, raising their 2013 tax rate on income above $400,000 to
39.6%, up from 35%. You can read more on
2013 tax brackets and tax tables here
2013 tax brackets and tax tables here.
The long-term rate for 2013 and 2014
For those earning less than $200,000 the capital gains tax rate
didn't change. Those above $200,000 will possibly see an increase
because of the new net investment income tax, also known as the
3.8% Medicare tax. Those earning above $400,000 saw a definite a
33% increase and also have to pay the net investment income tax,
which makes the increase on their top marginal rate for long-term
capital gains a whopping 58%!
Long-Term Capital Gains Tax Rate
The long-term capital gains tax rate is applied to stocks,
mutual funds, and other assets held longer than a year. Certain
other assets, including collectibles, precious metals, and
depreciated assets, get taxed at higher rates of 25%-28%,
depending on the type of asset, which you can read about
Net investment income tax or Medicare surcharge
While only the absolute top earners are going to be hit with the
5-percentage-point increase to the 20% long-term capital gains
rate, anyone earning over $200,000 could potentially be hit by
the net investment income tax, depending on their situation.
The 3.8% tax takes a few simple calculations to figure out.
The tax applies to the lesser of either:
- Your modified gross income above the threshold amount.
- Your net investment income. This includes gains from the
sale of stocks, bonds, ETFs, and mutual funds; capital gain
distributions from mutual funds; gains from the sale of
investment real estate (not including primary residences), or
gains from the sale of interests in partnerships and S
Net investment income tax example
An example makes this easier to understand. Say you are a single
taxpayer with $150,000 in salary and $100,000 in capital gains.
Your modified adjusted gross income is $250,000 while your net
investment income is $100,000. Your modified adjusted gross
income exceeds the threshold by $50,000 while your net investment
income is $100,000. The tax applies on the lesser of these two,
so it applies to the $50,000. You then owe the IRS an extra
$1,900 ($50,000 times 3.8%) for the tax.
Follow these steps to fight back against higher taxes in
Tax increases that took effect at the beginning of 2013 affected
nearly every American taxpayer. But with the right planning, you
can take steps to take control of your taxes and potentially even
lower your tax bill. In our brand-new special report "
How You Can Fight Back Against Higher Taxes
How You Can Fight Back Against Higher Taxes," The Motley Fool's
tax experts run through what to watch out for in doing your tax
planning this year. With its concrete advice on how to cut taxes
for decades to come, you won't want to miss out.
Click here to get your copy today -- it's absolutely free.
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