The power to tax may be the power to destroy, but tax policy is also capable of rewarding wise investors. This is something everyone should know heading into 2020, especially regarding capital gains. Did you know capital gains are profits made from the sale of property or investments? For example, if you buy a stock for $10,000 and sell it at $12,000, then you have a capital gain of $2,000. That gain, of course, is subject to being taxed; but not all capital gains taxes are created equal.
What many people do not realize is that the longer you wait to sell a profitable asset, the less tax you actually pay. One of the reasons why is because the U.S. tax system is designed to encourage long-term investment and therefore applies lower capital gains rates than what most workers pay in federal income taxes through their jobs.
A key consideration may surround timing and the key time period may be one-year. Selling a mutual fund, stock, bond, rental property, car, boat or other tangible item, several months after you bought it may result in a capital gains rate equivalent to what you’d pay if you received a standard paycheck from an employer. If you sold a mutual fund at least one year and one day after you bought it, however, then much lower capital gains rates could apply and that means more money in your pocket.
In 2020, depending on your income, long-term capital gains rates are tiered at 0 percent, 15 percent, and 20 percent. Qualified dividends also may receive these favorable rates, including many dividend stocks. Compare that with 2020 federal income tax rates and the benefits are there: Not only do earned income tax brackets range from 0 to 37 percent (as opposed to 0-20 percent), but single, non-head of household wage earners may pay 22 percent of their gross income to the IRS if they make just $40,125 per year. Married couples filing jointly could pay 22 percent on a combined $80,250.
Tax considerations can also be an important matter that you need to discuss with your estate planning attorney. Taxes, both now and well in the future, play a significant role in your planning for yourself, your family, and your business. You need to consider sharing this information with your estate planning attorney so that he or she is able to plan forward with you, and make sure your current estate plan structure can meet your needs. We encourage you to reach out to us now, or in the future, to discuss your estate planning need with us.