By Tom Herman
By tax-law standards, the rules on capital-gains taxes may
appear fairly straightforward, especially for taxpayers who qualify
for a zero-percent rate.
But many other taxpayers, especially upper-income investors,
"often find the tax law around capital gains is far more
complicated than they had expected," says Jordan Barry, a law
professor and co-director of graduate tax programs at the
University of San Diego Law School.
Here is an update on the brackets for this year and answers to
questions readers may have on how to avoid turning capital gains
into capital pains.
Who qualifies for the zero-percent rate?
For 2019, the zero rate applies to most singles with taxable
income of up to $39,375, or married couples filing jointly with
taxable income of up to $78,750, says Eric Smith, an IRS spokesman.
Then comes a 15% rate, which applies to most singles up to $434,550
and joint filers up to $488,850. Then comes a top rate of 20%.
But don't overlook a 3.8% surtax on "net investment income" for
joint filers with modified adjusted gross income of more than
$250,000 and most singles above $200,000. That can affect people in
both the 15% and 20% brackets. For those in the 20% bracket, that
effectively raises their top rate to 23.8%. "That 23.8% rate is the
rate we use to plan around for high net-worth individuals," says
Steve Wittenberg, director of legacy planning at SEI Private Wealth
There are several other twists, says Mark Luscombe, principal
analyst for Wolters Kluwer Tax & Accounting. Among them: a
maximum of 28% on gains on art and collectibles. There are also
special rates for certain depreciable real estate and investors
with certain types of small-business stock. See IRS Publication 550
for details. There also are special rules when you sell your
State and local taxes can be important, too, especially in
high-tax areas such as New York City and California. This has
become a much bigger issue in many places, thanks to the 2017 tax
overhaul that included a limit on state and local tax deductions.
As a result, many more filers are claiming the standard deduction
and thus can't deduct state and local taxes. But some states,
including Florida, Texas, Nevada, Alaska and Washington, don't have
a state income tax. Check with your state revenue department to
avoid nasty surprises.
How long do I typically have to hold stocks or bonds to qualify
for favorable long-term capital-gains tax treatment?
More than one year, says Alison Flores, principal tax research
analyst at The Tax Institute at H&R Block. Gains on securities
held one year or less typically are considered short-term and taxed
at the same rates as ordinary income, she says. The rules are "much
more complex" for investors using options, futures and other
sophisticated strategies, says Bob Gordon, president of
Twenty-First Securities in New York City. IRS Publication 550 has
details, but investors may need to consult a tax pro.
The holding-period rules can be important for philanthropists
who itemize their deductions. Donating highly appreciated shares of
stock and certain other investments held more than a year can be
smart. Donors typically can deduct the market value and can avoid
capital-gains taxes on the gain. But don't donate stock that has
declined in value since you purchased it. "Instead, sell it, create
a capital loss you can use, and donate the proceeds" to charity,
Mr. Gordon says. You can use capital losses to soak up capital
gains. Investors whose losses exceed gains may deduct up to $3,000
of net losses ($1,500 for married taxpayers filing separately) from
their wages and other ordinary income. Carry over additional losses
into future years.
If you sell losers, pay attention to the "wash sale" rules, says
Roger Young, senior financial planner at T. Rowe Price. A wash sale
typically occurs when you sell stock or securities at a loss and
buy the same investment, or something substantially identical,
within 30 days before or after the sale. If so, you typically can't
deduct your loss for that year. (However, add the disallowed loss
to the cost basis of the new stock.) Mr. Young also says some
investors may benefit from "tax gain harvesting," or selling
securities for a long-term gain in a year when they don't face
While taxes are important, make sure investment decisions are
based on solid investment factors, not just on taxes, says Yolanda
Plaza-Charres, investment-solutions director at SEI Private Wealth
Management. And don't wait until December to start focusing on
"We believe in year-round tax management," she says.
What if I sell my home for more than I paid for it?
Typically, joint filers can exclude from taxation as much as
$500,000 of the gain ($250,000 for most singles). To qualify for
the full exclusion, you typically must have owned your home -- and
lived in it as your primary residence -- for at least two of the
five years before the sale. But if you don't pass those tests, you
may qualify for a partial exclusion under certain circumstances,
such as if you sold for health reasons, a job change or certain
"unforeseen circumstances," such as the death of your spouse. See
IRS Publication 523 for details. When calculating your cost, don't
forget to include improvements, such as a new room or kitchen
Mr. Herman is a writer in New York City. He was formerly The
Wall Street Journal's Tax Report columnist. Send comments and tax
questions to email@example.com.
(END) Dow Jones Newswires
June 16, 2019 22:17 ET (02:17 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.