Capital Gains and Your Taxes: A Brief (But Important) Guide
Michael Baum, CFP® RICP®
Vice President & Associate Financial Advisor
Many people are surprised to learn that capital gains taxes don’t just apply to classic investments like stocks, but also to any other property that acquires value over time. If you profited from the sale of real estate, a car, boat, jewelry, or other such valuable items in 2022, you could be subject to capital gains taxes when you file your 2022 income taxes. Here’s what you need to know in order to reduce your tax burden to the extent possible and to be prepared for the amount of capital gains tax you’ll ultimately have to pay.
How Capital Gains Taxes Are Calculated
Capital gains taxes are calculated by subtracting the cost of the investment from the final selling price of said investment. This final amount is reported as capital gains. The amount of time you’ve held the investment is the first factor that will determine how it is taxed. Short-term investments (those held for less than a year) are taxed as ordinary income. Long-term investments (those held for more than a year) are taxed at a slightly lower rate.
The long-term capital gains tax rate depends on your income and your filing status (single, head of household, married filing separately, or married filing jointly), but it’s usually either zero, 15, or 20 percent. There are some types of investments that are taxed at higher rates, however. You should talk with your accountant or check the IRS website to understand which rate will apply to your situation.
What Isn’t Affected by Capital Gains?
Certain types of property and accounts are not affected by capital gains taxes. If you sell your primary residence, for example, the capital gains may be excluded, up to certain thresholds. Business property, including products and anything you create as an individual, such as a book you wrote or an invention you patent, are not subject to capital gains taxes. Specific retirement and education accounts are also not subject to capital gains taxes.
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Ways to Reduce Capital Gains Taxes
Investments may not always pay off. Sometimes a market change results in your property reducing in value. This reduction is also calculated on your taxes and is calculated into your capital gains taxes. This can lower your taxable income range.
For example, if you receive $90,000 from selling one investment, you would be taxed in the 15 percent range. But if you also lost $15,000 on another investment, this would drop your total income from investments to $75,000, which could place you beneath the 15 percent tax range. These reductions and gains can only be combined if they are the same type of investment, long-term or short-term, and are sold in the same year.1
Another way to reduce capital gains taxes in the current year is to use the income to invest in a similar property type.2 This is called a like-kind exchange. Just make sure to consult the IRS website or your tax professional before moving forward on any like-kind exchange, as the requirements and investment types have changed over the years.
A Final Word
Make sure you prepare to protect your investments from higher tax rates. And when selling an investment, or even a piece of property, make sure to consult a financial advisor or IRS representative to help determine how much you could be taxed.
Better yet, work those types of decisions into a forward-thinking financial strategy, rather than waiting until tax time. Our Plan Well, Invest Well, Live Well strategic process at Weiss, Hale & Zahansky Strategic Wealth Advisors can help you to maximize your income and savings while minimizing needless tax burden. You can request a complimentary consultation on our website, by phone at (860) 928-2341, or by email at info@whzwealth.com.
Presented by Vice President, Associate Financial Advisor, Michael Baum, CFP® RICP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860.928.2341. http://www.whzwealth.com
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