I know the capital gains rate “for the rich” will go up if the Bush tax cuts expire. Are there tax brackets for capital gains like for earned income, or will it go up for the rest of us too?
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There are different levels of tax on capital gains but most folks that have capital gains are at the top rate. A change in the capital gains tax rates will effect almost everybody not just the rich. The politicians would like you to think it only effects the “rich” whom they have demonized. In addition to the people that pay the capital gains tax such a change in the rate will effect those that make the things that others buy to pay capital gains tax. If you work in the factory that makes the equipment the “rich” buy for their business and they don’t make that purchase because of the tax increase you might just be out of a job.
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Short term CG are taxed at your marginal rate. Nothing is changing there, aside from the rate. Long term CG are currently taxed at 0% or 15%, depending upon your total income. That’s set to rise to 5% or 20% if nothing changes.
The Democrat proposal is to keep long term CG rates at the current 0% and 15% for taxpayers with taxable incomes of less than $250k per year but to introduce a progressive rate of up to 25% for higher income taxpayers. Republicans have been hard-rocking the issue with an “all or nothing” scorched earth position, however House Republicans seem to have softened a bit if Mr Boehner is to be believed. (Yeah, right.) Senate Republicans have not budged yet on their position.
My guess: Nothing happens until after November. If the Republicans take over both the House and Senate, the current tax rates will be continued using the budget reconciliation process (the same process that they used in 2003 to cut the rates to the current levels). If the Democrats maintain control of at least the Senate, they will use budget reconciliation (while Republicans howl and scream about the injustice of it all) to push through their agenda of continuing tax rates at the current levels for those earning less than $250k – $500k while raising rates by about 10% for incomes in excess of that level. (Their current proposal is $250k but they may throw a “bone” to the right by bumping it up to $500k or maybe a bit higher.)
At present the cap gains tax is stepped according to your bracket; if or when the Bush tax cuts expire they will increase to whatever the tax is for the bracket you are in.
You didn’t ask it this way, but it always seems to come up.
Let’s say you are single and your taxable income without long term capital gains is $30,000. That puts you in the 15% tax bracket. That tax bracket currently has a 0% LTCG rate. So you sell some stock and have a LTCG of $10,000 thinking you will owe $0 on it. Not true. The first $4000 is at 0% (because $30,000 + $4000 still fits in the 15% tax bracket for 2010), but the next $6000 is at 15% because it’s in the next tax bracket (25% for ordinary income and 15% for LTCG).