Investors who have taxable accounts—as opposed to tax-favored retirement accounts such as individual retirement accounts (IRAs) or 401(k)s—are often eligible for lower tax rates on investment income and other benefits.

What is capital gain or loss?

When an investor sells a holding in a taxable account, the result is a capital gain or loss that is the difference between the investment’s original cost (plus adjustments) and its selling price.For example, if an investor buys a share for $6 and sells it for $10, the capital gain is $4. If that person buys another share for $6 and sells it for $4, then the capital loss is $2.

Do you pay taxes on dividends and capital gains?

Yes, but a key benefit is that capital losses can offset capital gains. If the investor in this example sells both shares in the same calendar year, he or she would net the $4 gain with the $2 loss, for a taxable capital gain of $2.If total losses exceed total gains, the net losses can offset up to $3,000 of “ordinary” income such as wages a year. Remaining unused capital losses can then be carried forward to offset future capital gains and ordinary income.

What is the current tax rate on capital gains and dividends?

Long-term capital gains are profits on investments held longer than a year. They are taxed at favorable rates of 0, 15% or 20%.

Short-term capital gains are profits on investments held a year or less, and they are taxed at the higher rates that apply to ordinary income. This is a key distinction frequent traders should pay careful attention to.

The favorable tax rates for long-term gains also apply to “qualified” dividends, and most dividends fall in this category. Nonqualified dividends are taxed at the higher rates for ordinary income like wages.

Will capital-gains tax increase in 2023?

Congress hasn’t made changes to rates on long-term capital gains and dividends for 2022 and 2023.

What is the 3.8% surtax?

A 3.8% surtax applies to net investment income for most single filers with adjusted gross income (AGI) above $200,000 and most couples filing jointly with AGI above $250,000. This surtax applies only to the amount of net investment income above those thresholds, which aren’t indexed for inflation.

For example, say that Marian is a single taxpayer with $150,000 of salary plus a $50,000 taxable long-term gain and $25,000 of qualified dividends. She would owe the 3.8% surtax on $25,000. Because of this surtax, top-bracket taxpayers typically owe 23.8% instead of 20% on their long-term gains and dividends. Some taxpayers in the 15% bracket for investment income also owe the 3.8% surtax on part or all of it because their adjusted gross income is above the $250,000/$200,000 thresholds.

Here’s another example. Matthew is a single taxpayer with $210,000 of adjusted gross income, and $50,000 of that is a windfall from a long-term gain on an investment and some qualified dividends. In that case, all of Matthew’s investment income would be taxed at a 15% rate, and he would also owe an additional 3.8% on $10,000 because that is the amount exceeding $200,000. So his tax rate on the $10,000 would be 18.8%.

How does the zero rate apply?

Here is a simplified example. Janet is a single taxpayer with $35,000 of taxable ordinary income for 2022 after deductions and exemptions, such as for tax-free municipal-bond interest. Her taxable income is subject to rates up to 12%, as detailed in the income-tax brackets shown in The Wall Street Journal’s tax guide.

But Janet also has $20,000 of net long-term capital gains. This “stacks” on top of her $35,000 of taxable income, giving her a total of $55,000. For 2022, the 15% bracket for capital gains begins at $41,676 of taxable income for single filers. As a result, Janet would owe zero tax on about $7,000 of her gains and 15% on about $13,000 of them.

 

By Laura Saunders

Write to Laura Saunders at Laura.Saunders@wsj.com

Wall Street Journal


Disclosure:

Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.

This is for informational purposes only, does not represent legal or tax advice does not indicate suitability for any particular investor, and does not constitute an offer to purchase or sell investments. Please consult the appropriate professional regarding your individual circumstance.

There are retirement account risks that could diminish investor returns, such as, but not limited to: low interest rates, market volatility, withdrawal timing and sequence of returns risk, government policy uncertainty and increased longevity. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.

Advisory Services are offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through registered representatives of Concorde Investment Services, LLC. (CIS) or RCX Capital Group, LLC (RCX), both members of FINRA/SIPC. Insurance Services offered through Asset Strategy Financial Group, Inc. (ASFG). ASA, CIS, RCX and ASFG are independent of each other. All research reports from third parties are for informational purposes only.

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