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2014 Capital Gains Tax: 6 Things You Need to Know

Everyone likes to earn a profit on their investments. But when you sell those winning investments, you'll usually have to pay tax on the resulting capital gains. Although the 2014 capital gains tax isn't changing dramatically from last year's tax structure, it's still more complicated than many people understand. Here are some of the most important tips you should know in order to pay as little in 2014 capital gains tax as possible when you file your tax return next year.

1. For individual stocks and bonds, you don't owe capital-gains tax until you sell.
The best thing about the capital-gains tax is that you get to decide when you pay it. With individual stocks, capital-gains tax is triggered only when you sell, so if you hold on to your shares for the long run, you'll go for years or decades without owing any tax.

Unfortunately, that's not the case for mutual funds, as you can owe tax on capital-gains distributions even if you don't sell the shares. But with ETFs, the differences in the way they're structured tends to minimize or eliminate the tax hit, with both SPDR S&P 500 (NYSEMKT: SPY  ) and Vanguard Total Stock (NYSEMKT: VTI  ) incurring no capital-gains tax liability in 2013.

2. Short-term capital gains have the highest taxes.
Traders who do a lot of buying and selling in taxable accounts quickly find that capital-gains taxes represent a big hit to their profits. The rate on short-term capital gains is equal to your ordinary income tax rate, which ranges as high as 39.6% in 2014. Short-term treatment applies if you hold on to an investment for a year or less, so keep that in mind before you decide whether to sell.

3. Long-term capital-gains rates get complicated.
Hold an asset for longer than a year, and you'll typically pay less in capital-gains taxes. But the 2014 capital-gains tax rates for long-term gains vary widely depending on your income and the type of gain.

For most long-term capital gains, those in the two lowest tax brackets pay no capital-gains tax at all. Those in higher brackets pay a maximum of 15%, except for those in the top bracket, who pay 20%.

But there are also special cases where higher maximum rates apply. If you've depreciated certain types of property, then you have to recapture some of that depreciation when you sell, and the resulting gains get taxed at 25%. Meanwhile, for sales of collectibles and small-business stock, a maximum of 28% applies. For investors, the key to remember is that precious-metals bullion investments like gold and silver coins are treated as collectibles, as are the popular exchange-traded vehicles SPDR Gold Shares (NYSEMKT: GLD  ) and iShares Silver (NYSEMKT: SLV). Bear in mind, though, that you'll never pay more than your ordinary tax rate.

4. High-income taxpayers get an extra hit.
Starting last year, a new 3.8% net investment income tax started to apply for high-income taxpayers. If you earn more than $200,000 for single filers or $250,000 for joint filers, then your capital gains -- whether they're long term or short term -- as well as other investment income will be subject to the extra 3.8% tax. That makes selling investments at a gain even more costly.

5. There's one way to avoid capital-gains tax entirely -- but there's a big catch.
An arcane provision of the tax laws helps many families not have to pay any capital-gains tax, even on investments that have produced huge increases in value. The problem: You have to die in order to claim it.

When you die, your assets get what's called a step-up in basis. That has the effect of zeroing out all your capital gains and losses as of the date of your death. That's great news for your heirs, who get to sell the assets they inherit without the tax liability you would have incurred if you had sold. But obviously, it's not a planning technique that most people are anxious to use before they absolutely have to.

6. Don't want to pay 2014 capital-gains tax? Use losses to offset gains.
One of the most popular tax strategies involves taking capital losses on your losing investments in order to offset the capital-gains tax you owe when you sell winning investments. You'll pay tax on your net capital gains, after subtracting losses from profits on your investment positions. As a result, if you have big capital gains early in the year, it pays to look for investments where you can harvest tax losses to offset those gains and reduce your tax bill.

Be smart about your taxes
Having capital gains is always good, as it means you made a profit on your investments. By keeping these tips in mind, you can pay less in 2014 capital-gains tax and keep more of your hard-earned money away from the IRS.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (31) | Recommend This Article (138)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2014, at 5:23 PM, bonsaibean wrote:

    As one of modest income, but a reasonable level of resources, I'm loving the 0% long term cap gains rates. I really thought it was going to go away 2 years ago, and couldn't believe that they made these rates "permanent".

    Having retired early 3 years ago, I can generally manage my income to take full advantage of this break.

  • Report this Comment On February 17, 2014, at 5:54 PM, sibg26 wrote:

    Infomative & useful

  • Report this Comment On February 17, 2014, at 6:31 PM, StarWitchDoctor wrote:

    THANKS DUDE.

  • Report this Comment On February 17, 2014, at 6:56 PM, Galway21 wrote:

    Maybe you could explain about Roth IRA and what tax applies

  • Report this Comment On February 17, 2014, at 7:25 PM, ellaerdos wrote:

    Good article, factual and informative,

  • Report this Comment On February 17, 2014, at 7:27 PM, Seanickson wrote:

    thanks for the info. I made the mistake this last year of realizing 0% federal taxable long term cap gains but forgot about the state taxes. If I was thinking more clearly I would have continued to defer them.

  • Report this Comment On February 17, 2014, at 8:09 PM, jra3h9 wrote:

    How are ETFs structured that there are no capital gains incurred?

  • Report this Comment On February 17, 2014, at 9:25 PM, Hellborn69 wrote:

    From a taxation point of view, is it better to own an MLP ETF (like Alerian or Kinder Morgan) in a taxable or retirement account like a Roth IRA or 401K?

    Thanks to anyone who can answer this!

  • Report this Comment On February 17, 2014, at 10:04 PM, 48BabyBoomer wrote:

    Expansion on the step-up in basis at time of death - paper losses ALSO step up in basis which in simple terms means they are lost forever when the underwater value of the investment is raised to current market value at time of death. Death comes in many fashions, but when the end is "known" tax losses should be taken, or the securities transferred to someone else who can benefit from the loss.

  • Report this Comment On February 17, 2014, at 10:18 PM, judgementdey wrote:

    MLP, REIT and BDC dividends are all unqualified. So they will be taxed at ordinary tax rate in a taxable account. It is best to hold them in any form of retirement account so that all the dividends will be tax-free.

    Regards,

    Sid

    >>From a taxation point of view, is it better to own an MLP ETF (like Alerian or Kinder Morgan) in a taxable or retirement account like a Roth IRA or 401K?

    Thanks to anyone who can answer this!

  • Report this Comment On February 17, 2014, at 11:48 PM, dslee wrote:

    If you donate to charity, giving appreciated stocks is a great vehicle. You don't pay any capital gains taxes, and you can deduct the full amount of the value of the stocks. But you can only donate stocks you've held for at least a year.

  • Report this Comment On February 19, 2014, at 5:41 PM, dgmennie wrote:

    Now all I need is some Capital!

  • Report this Comment On February 21, 2014, at 2:20 PM, jlh939 wrote:

    Keep in mind that you may not always be the one in charge of selling. I just got zinged because of an acquisition where the merger of two companies resulted in all stock being sold. So, shareholders pay capital gains tax, whether or not they planned on that.

  • Report this Comment On February 21, 2014, at 2:32 PM, strongfam2 wrote:

    But no Capital Gains from year to year, even on stock transactions, within an IRA or 401k...correct? I haven't been worried about how long I hold a stock in my IRA brokerage account and was assuming that long-term short-term was irrelevant because I pay based on income when I withdraw at retirement.

  • Report this Comment On February 21, 2014, at 2:36 PM, WineHouse wrote:

    Reply to Sid ("judgement day") re MLP's -- if you have more than a certain amount of a certain type of income from the MLP, then it is taxable EVEN IF IT IS IN A TAX-DEFERRED OR NONTAXABLE account. However, most MLP's are in and of themselves tax shelters of a type. AND you won't know for sure whether or not that type of income was realized until it's too late -- you can only learn that from the K-1 which is issued AFTER the relevant fiscal year is over. So unless you know for an absolute fat that you won't go over that specific type of MLP income in your tax-preferences retirement account, the best thing is to keep those types of investments in a fully taxable account and enjoy the intrinsic tax benefits of the MLP. I don't know the 2014 specific dollar amount cut-offs, but they should be easy to find on the web. And I've forgotten the specific name of the type of income that causes the problem -- my apologies, and again you should be able to learn that from a CPA or the Web.

  • Report this Comment On February 21, 2014, at 4:35 PM, bailey57 wrote:

    Reply to WineHouse & Sid re MLP's - If you have more than $1,000 (2013 cutoff amount) of UBTI (annual unrelated business-tax income) you could incur taxes. Also, many financial institutions will not allow you to or do not like to hold MLP's in IRA accounts. I hold my MLP's in my taxable account due to the tax advantages and because my bank does not allow them in IRA's. I agree 100% with WhiteHouse - Google MLP in your IRA, as there are many excellent articles on the web. Most experts will advise you not to place MLP's in your IRA. Also, you may need to contact your CPA or tax advisor, depending on your personal situation..

  • Report this Comment On February 21, 2014, at 6:40 PM, whyaduck1128 wrote:

    Winehouse and bailey 57 are correct. Do not own MLPs inside a tax-deferred vehicle such as an IRA, Roth IRA, or 401 (k). Just...don't...do...it.

    As a matter of fact, speaking as a tax preparer, I don't think you should own them, period (I own one myself, and ought to sell it and take the loss, but I'm stubborn). Most of that great "yield" you get is a return of capital--that's right, your own money. Sure, you may not pay taxes on it, but it lowers your basis, and the tax man or woman may have their hooks in you when/if you sell (and just try to explain to a layman how you can buy at 35, sell at 20, and have a tax GAIN). In addition, they are a pain in the rear when it comes to taxes. Even tax preparers get ticked off when it comes to these things, particularly because many of them don't issue their K-1s until near the tax deadline.

  • Report this Comment On February 21, 2014, at 6:50 PM, whyaduck1128 wrote:

    BTW--This was a very good article, Dan. Good work by you and any staff who contributed, factually correct and well written.

    I would add one more thing, though, and given the Fool's worship of all things Buffett, I'm kind of surprised you didn't mention it. Call it Number 5A--

    The best way to avoid capital gains tax is to not sell. Period.

  • Report this Comment On February 21, 2014, at 8:31 PM, polmazurka wrote:

    1 does turbo tax handle MLPs?

    2 i know that 1099-DVI/int are for mutual funds but is there a special form for just stocks?

  • Report this Comment On February 21, 2014, at 8:51 PM, TMFGalagan wrote:

    @Galway21 - A Roth IRA is generally tax-free; no capital gains tax should apply.

    @jra3h9 - One big way ETFs avoid tax is in the creation/redemption process of ETF shares. With mutual funds, you're always dealing directly with the fund itself when you buy and sell. But with ETFs, there are intermediaries, and that process makes capital gains less onerous.

    @hellborn69 - A note: Kinder Morgan is an MLP, not an ETF. There are special rules governing MLPs that make them undesirable in IRAs in some cases. MLP ETFs are often structured as corporations, making them more suitable for IRAs but also taking away some of the tax benefits that MLPs have, as others described above.

    @polmazurka - Stocks use 1099-DIVs as well in most cases.

    best,

    dan (TMF Galagan)

  • Report this Comment On February 21, 2014, at 8:54 PM, strongfam2 wrote:

    Still Seeking Confirmation within IRA..."No Capital Gains from year to year on regular non-MLP stock transactions within an IRA or 401k...correct? I haven't been worried about how long I hold stock in my IRA brokerage account and was assuming that long-term/short-term gains are irrelevant because I pay based on income when I withdraw at retirement." Is that correct? (except for MLPs) Thanks.

  • Report this Comment On February 22, 2014, at 12:41 AM, Pilot1 wrote:

    Very Informative,

    Up until a year ago all my stock investments were IRA or 401K so i didn't have to worry about the immediate tax implications but when a CD came due, I bought shares of MF Great American Fund. I got a notice at the end of the year that i had capital gains to worry about this year. I was figuring that i didn't have to worry about those until I sold the shares but thanks to this article I now understand. Hopefully Turbo Tax will walk me through it.

  • Report this Comment On February 22, 2014, at 11:05 AM, Rowland wrote:

    One missing strategy in this article, is you can give away your appreciated assets to charity and also avoid all capital gains tax exposure. If you're a generous person who routinely gives cash from income, do this instead. Give away your LT appreciated positions, and repurchase them with the cash you had been giving to charity. Avoids gain tax, resets your investment cost basis, and provides more benefit to the charities you love, versus giving after tax gains. Now that's "foolish". Contact here to learn more

    http://greaterchicago.nationalchristian.com/contact

  • Report this Comment On February 22, 2014, at 12:09 PM, SkepikI wrote:

    For the unwary seeking to utilize losses in 2014: Careful of the "wash sales rule" which Dan did not mention, no doubt to avoid confusion. But just to complicate your life, you cannot create a loss through the sale of an asset, stock, bond etc if you buy the same thing back within 30 days.

    This caught me when I was a young investor, seeking to be clever on a stock I knew well. It wont wash with the IRS ;-) they will treat it as if you never sold. YOU CAN however buy a very similar asset as long as its not identical...for instance sell a S&P 500 index and buy another similar index or Mutual Fund as long as its not the S&P 500.

    AND you would be wise to be thinking about this for the next oh 9 months and not waiting till Nov and Dec to do it along with the rest of the crowd, when everyone is writing articles about it. Even though it didn't happen in 2013, it frequently shows up to depress the market in the closing days of the year, OR the 40th-32nd days preceding the close of the year.

  • Report this Comment On February 23, 2014, at 11:44 AM, rkf1048 wrote:

    I am assuming that this article is aimed at US residents as the tax thresholds are quoted in dollars and %age rates do not align with my understanding of UK rates. In which case why am I as a UK resident being sent this? Its not the first time I have been sent irrelevant information and am rapidly losing interest in the Motley Fool!

  • Report this Comment On February 23, 2014, at 2:23 PM, rob1fitz wrote:

    @strongfam2 You are correct. No taxes in tax deferred accounts until withdrawn.

    @polmazurka I don't know about turbotax but taxcut delux did not handle K-1's in 2012 when I tried it. Since I bought Kinder Morgan I've been using a CPA.

    I used to enjoy doing my own taxes but find I enjoy NOT doing them even more!

  • Report this Comment On February 24, 2014, at 6:24 PM, thanbo65 wrote:

    There's another way to avoid capital gains taxes: donation of appreciated securities to charities. In fact, you wind up saving on tax twice: you don't pay the capital gains tax, AND you get to deduct the donation from your income, if you itemize. The receiving organization sells it, and as a tax-exempt organization, they don't have to pay tax on it.

    Of course you don't get the money yourself, but if you want to give a lot of money to some charity (church, synagogue, relief organization, whatever), this is a tax-savvy way to do so.

  • Report this Comment On February 24, 2014, at 9:19 PM, PHBLYTHE wrote:

    A question. Can you take long term loses against short term gains?

  • Report this Comment On February 25, 2014, at 12:02 AM, Velcro1000 wrote:

    There seems to be a great deal of misunderstanding about owning MLP's.

    Yes, the distribution is tax deferred, but here are the tricks: If you hold an MLP in your retirement account, you can only get tax deferred distribution up to a total of 1000 Dollar per year. Anything over you have to pay taxes, otherwise you are in violation of the law.

    If you hold shares in your regular account, you do get the tax deferred status, but if and when you finally sell your MLP shares, (like depreciation) you have to deduct any deferred distributions from your cost basis. I held Kinder Morgan LP shares for years. When I finally sold them because I was tired of the tax forms that had to be filled out (not only are additional forms necessary to keep track of you deferred income, the K-1's that are sent our by the Company are chronically late and I always had the appointment with my tax adviser at the last minute, when he was the busiest. When I finally had enough and sold my MLP shares, the entire recapture amount was added to my income and pushed me into the highest tax bracket. Today, I would think twice about investing in ML:P's unless you hold them until your death, and I do not even know if in he case of MLP's your heirs will get the stepped up cost basis. Anyone who contemplates investing in MLP's better do their home work.

  • Report this Comment On February 27, 2014, at 10:59 AM, jacksongirls wrote:

    I've been having a lot of fun investing, holding, selling through my IRA. No capital gains concerns for years!

  • Report this Comment On August 31, 2014, at 5:38 PM, donflr wrote:

    Does your point 5. apply when only one of two joint owners dies? In other words, 'no cap gains tax' ?

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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