By Dan Dzombak
We're less than a month away from the filing deadline for 2013 taxes. (Today, actually)...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 earners.
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.
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%!
Tax Bracket | Long-Term Capital Gains Tax Rate |
|---|---|
10%-15% | 0% |
25%-35% | 15% |
39.6% | 20% |
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 here.
Net investment income tax or Medicare surcharge tax
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.
Source: IRS.
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 corporations.
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.
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