Tax season is just around the corner and changes to the capital gains tax rates will affect taxpayers filing their returns at the beginning of 2014. If you sold capital assets during 2013, you might be subject to the increased rates. This brief provides important information on preparing for the capital gains tax hike. Capital gains tax is the tax on capital asset profits—the profit made from selling an item bought for personal investment. On January 1, 2013, the government passed the American Taxpayer Relief Act of 2012 (ATRA). The ATRA added a top federal income bracket of 39.6% and increased the long-term capital gains tax rate to 20% starting in the 2013 tax year.

1. GAMABrief:
Preparing for the Capital Gains Tax Hike
Tax season is just around the corner and changes to the capital gains tax rates will affect taxpayers filing their returns at the
beginning of 2014. If you sold capital assets during 2013, you might be subject to the increased rates. This brief provides important
information on preparing for the capital gains tax hike.
Capital gains tax is the tax on capital asset profits—the profit made from selling an item bought for personal investment. On
January 1, 2013, the government passed the American Taxpayer Relief Act of 2012 (ATRA). The ATRA added a top federal
income bracket of 39.6% and increased the long-term capital gains tax rate to 20% starting in the 2013 tax year.
Short-­‐
and
Long-­‐Term
Capital
Gains
There are two types of capital gains: short-term and long-term. Short-term capital gains are profits made from selling capital
assets owned for less than a year. Long-term capital gains are profits made from selling capital assets owned for more than one
year.
The tax rates for short-term and long-term capital gains are different. Short-term capital gains are lumped together with regular
income and are taxed according to an income earner’s tax bracket. Conversely, long-term capital gains are taxed at a lower set
rate based on the earner’s tax bracket.
Historical
Trends
of
the
Capital
Gains
Tax
Rate
The government uses the capital gains tax as a mechanism to generate funds. Given the current and growing national debt, it is
no surprise that the capital gains tax increased as the government searches for ways to make more revenue.
Historically, the capital gains rate has been much higher than it is now. From 1917 to 1921, the capital gains tax rate reached highs
of more than 70%. During the 1930s, the rate often neared 40%. And, in the post World War II era, the capital gains rate has
been, on average, about 25.5%. While not necessarily comforting for those subject to the increased rate, high capital gains rates in
the past may put the current rate into perspective.
Key
Changes
for
the
2014
Tax
Filing
Season
For most taxpayers, the short- and long-term capital gains tax rate will remain the same. For short-term capital gains, the federal
income tax rates remain at 10%, 15%, 25%, 28%, 33% and 35%. For long-term capital gains, individuals in the 10% and 15%
income tax brackets continue to have a 0% capital gains tax rate and 15% for those in the 25%, 28%, 33% and 35% tax brackets.
The ATRA will affect the short- and long-term capital gains tax rates for upper income earners—singles with taxable annual
income above $400,000, married joint-filers with taxable annual income above $450,000 and heads of household with a taxable
income above $425,000.
For short-term capital gains (and non-qualified dividends), a top federal income tax bracket was added, making the maximum
rate 39.6% rather than 35% for upper income earners. For long-term capital gains (and qualified dividends), the maximum cap on
the tax rate increased from 15% to 20% for upper income earners.
A GAMA White Paper produced by Nicole Nord © 2013. Gagnier Margossian LLP. All rights reserved.

2. Tax
Bracket
Taxable Income - Joint (Single)*
$0 - $17,850 ($0 - $8,925)
$17,851 - $72,500 ($8,926 - $36,250)
$72,500 - $146,400 ($36,251 - $87,850)
$146,401 - $223,050 ($87,851 - $183,250)
$223,051 - $398,350 ($183,251 - $398,350)
$398,351 - $450,000 ($398,351 - $400,000)
$450,001 - above ($400,001 - above)
Long Term Capital Gains Rate
2012
2013
0%
0%
15%
15%
15%
15%
15%
10%
15%
25%
28%
33%
35%
39.60%
0%
0%
15%
15%
15%
15%
20%
*Based on 2013 inflation rates.
Obamacare Medicare kicks into effect for the 2013 tax year, meaning there is now a 3.8% Medicare tax on investment income
(an income that includes capital gains and dividends). The tax is imposed on those with a modified adjusted gross income (MAGI)
greater than $200,000 for singles and heads of household and $250,000 for married joint-filers. Including the Medicare tax, upper
income earners have a top long-term capital gains (and qualified dividends) tax rate of 23.8% and top short-term capital gains
(and non-qualified dividends) tax rate of 43.4%.
Upper Income Earners
Top Tax Rate
2012
2013
Long-term capital gains
15%23.8%*
Taxable income
35%
39.6%
Short term capital gains
35%43.4%*
*Includes 3.8% Medicare Surtax
Being
Prepared
for
the
Tax
Season
and
Looking
Ahead
to
2015
As you prepare for the 2014 tax filing season and think ahead to 2015, there are several important points to keep in mind.
First, the capital gains tax rate changes and 3.8% Medicare tax along with reductions in personal and itemized deductions will cut
significantly into the income of upper income earners and those with an MAGI higher than $200,000 for singles and heads of
household and $250,000 for married joint-filers.
Second, while the ATRA makes the rates “permanent,” this does not mean that the rates will remain the same in the coming
years. In fact, the capital gains tax rate will likely increase rather than decrease in the near future. Some predict that the long-term
capital gains and qualified dividends will eventually be taxed like short-term capital gains—as ordinary income, with a possible cap
at 28%.
Finally, the IRS recently announced the annual inflation adjustments for several provisions for the 2014 tax year, to be filed in
2015. Notably, thresholds for upper income earners will be $406,750 for singles, $457,600 for married joint-filers and $432,200
for heads of household, up from $400,000, $450,000 and $425,000 respectively.
Considering
tax-­‐efficient
strategies
and
strategizing
your
investment
and
income
decisions
will
be
criMcal
as
you
plan
for
the
upcoming
tax
season.
If
you
have
quesMons,
contact
an
aRorney
at
Gagnier
Margossian
LLP
to
explore
your
opMons.
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