The capital gains tax is a tax that can be levied when you realize a gain. A gain is realized when the assets that have appreciated in value are sold and you take possession of the liquidity.
Capital gains are divided into two distinct categories for tax purposes. There are short-term capital gains, and long-term capital gains. A gain is a short-term capital gain when the asset in question is sold within one year of the original acquisition. Short-term capital gains are taxed at your regular income tax rate.
With long-term capital gains, which are gains that are realized more than a year after the original purchase, the scenario is quite a bit different. The powers that be want to encourage long-term investing, so the rate on long-term capital gains is not equal to your regular income tax rate.
The exact long-term capital gains rate that applies to you would be based on your income. For most people, the long-term capital gains rate is 15 percent at the present time. People in the very lowest income tax brackets pay no long-term capital gains taxes at all.
At the present time, the maximum long-term capital gains rate is 20 percent. To find yourself in this bracket, you have to claim at least $413,200 as a single tax filer. If you are married and you are filing jointly, this figure rises to $464,850.
High income earners may also be forced to pay a Medicare surtax on investment income. The rate of this tax is 3.8 percent, and it would be applicable if you are a single filer with an adjusted gross income over $200,000.
Estate Planning Implications
When you hear about the existence of the capital gains tax, you may wonder about the estate planning implications. If you leave appreciated assets to your heirs, will they be forced to pay capital gains taxes if they sell the assets?
The answer to this question is no. Inherited appreciated assets get a step-up in basis. The inheritors would not be responsible for the gains that took place during your life. For capital gains purposes, the value of the inherited assets would be equal to their value at the time of acquisition.
However, if the assets continue to increase in value, the capital gains tax would be applicable if and when the gains are realized.
Schedule a Consultation
You should have a full understanding of how taxes can impact the estate that you will be passing along to your loved ones. If you have questions about taxation or any other estate planning matter, we would be glad to provide you with answers.
To schedule your consultation, you can contact us through this page: Sacramento CA Estate Planning Attorneys.
To learn more, please download our free Northern California Durable Power of Attorney here.
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