Investors have enjoyed huge gains in the stock market over the past five years, and many have seen their portfolios recover most or all of their losses from the financial crisis. But if one of your resolutions for the coming year is to lock in some of those profits, you'll probably end up paying capital gains tax in 2014. Let's take a quick look at the rates on the capital gains tax for 2014 and what you can do to cut your tax bill.
Capital gains tax in 2014: rates unchanged
The good news for taxpayers is that the tax rates on capital gains for 2014 remain unchanged from current levels. This means that depending on how long you own an investment, you could enjoy preferential capital gains rates that can sometimes mean paying no taxes at all on your gains.
The first question in determining how much you owe in capital gains tax is how long you've owned the investment you're selling. If you've held an investment for a year or less, then you'll generally pay the same ordinary income tax rate you pay on the rest of your income. But sales of investments you've held for longer than a year qualify as long-term capital gains, and get lower rates.
In most cases, the rates for long-term capital gains tax in 2014 are:
- 0% for long-term capital gains income that falls in the 10% or 15% tax brackets for low-income taxpayers;
- 20% for long-term capital gains income that falls in the 39.6% tax bracket for high-income taxpayers;
- 15% for all other long-term capital gains income.
But those rates don't tell the whole story, because capital gains also count as net investment income for purposes of a 3.8% surtax on certain high-income taxpayers. If you're single and make more than $200,000, or file a joint return and make more than $250,000, then you'll have to pay the surtax on top of your regular capital gains tax for 2014.
Some special rules
Unfortunately, capital gains tax rates can get even more complicated. That's because special rates apply to certain types of investments.
For instance, collectibles like gold and silver bullion aren't eligible for the long-term capital gains rates listed above. But they do get a slightly lower maximum capital gains rate of 28%, which can help certain high-bracket taxpayers. These collectibles rates apply not just to actual physical items but also to certain exchange-traded products that own them, including SPDR Gold (NYSEMKT:GLD), iShares Gold (NYSEMKT:IAU), and iShares Silver (NYSEMKT:SLV).
In addition, if you've taken depreciation on an investment, then you often have to pay tax to "recapture" that depreciation when you sell it. The depreciation recapture rate is 25%.
How to minimize what you'll pay
The tactics for minimizing capital gains tax in 2014 are the same as they are in most years. Holding onto investments long enough to qualify for long-term rates can save you a bundle. If you're prone to buy and sell frequently, then looking at tax-deferred accounts like IRAs and 401(k)s to avoid taxable gains entirely is a smart move. Otherwise, you could be looking at paying a lot of capital gains tax in 2014.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.