Even though 2022 was a challenging year for the stock market, many long-term investors still have significant capital gains on their taxable assets. Numerous forecasts for 2023 indicate potentially promising stock market gains. Expect additional volatility throughout the year, if nothing else. Tax planning is vital to successful investing, although it is frequently disregarded. Investing tax-efficiently is a terrific method to increase net after returns without making risky bets.
Your net profit is taxed as either a long or short-term capital gain at the federal level when you sell an investment assets for more than your cost basis (basically, what you paid for the transaction). Your state-specific capital gains tax liability will be determined at the state level. For instance, California taxes capital gains similarly to regular income, with a top state tax rate of 13.3%. OUCH! Tax preparation is even more beneficial for my local clients because I’m a financial advisor in Los Angeles.
The taxes on your capital gains will significantly influence how long you hold your investments. You will be subjected to capital gains taxes if you have owned the investment asset you are selling for a while greater than one year.
Having mutual funds in a taxable account puts you at risk of receiving phantom income. You might experience a loss as a mutual fund investor in a given year, but you’ll still be responsible for paying capital gains taxes on the fund’s realized gains. This is similar to playing hot potato, I suppose. When gains are divided, whoever still owns the fund will be responsible for paying the taxes.
Let’s examine how the federal government will actually tax your long-term capital gains on investments. Generally speaking, long-term capital gains will have a more favorable (lower) tax treatment than short-term capital gains. Long-term capital gains are generally taxed at 0%, 15%, or 20%, depending on your taxable income and marital status.
If your income is less than $44,625 in 2023, you can benefit from the zero percent capital gains rate as a single taxpayer. The 15% capital gains rate, which is applicable to incomes between $44,625 and $492,300, will be applied to most single people with investments. For single filers with revenues exceeding $492,300, the long-term capital gains rate will be 20%.
The brackets are slightly larger for married couples who file jointly, but the majority will see the marriage tax penalty applied to their investment income. The good news is that married couples with a combined income of $89,250 or less continue to be taxed at 0%. Who doesn’t adore money earned tax-free? The capital gains rate will be 15% for married couples earning between $89,250 and $553,850 combined income. A 20% long-term capital gains rate will be applied to those whose combined incomes exceed $553,850.
Taxation Norms In Real Estate Investments
There are several tax benefits when selling real estate, especially your primary residence. You may be able to save a sizable sum of money on taxes when you sell your house (principal residence). When you sell your principal residence, you might not be subjected to pay any capital gains taxes in many areas of the nation.
If they sell their primary dwelling, homeowners who are single (i.e., not married) may be entitled to exclude up to $250,000 in capital gains. If a married couple sells a primary residence, this amount doubles to $500,000 instead. You must have resided in your principal residence for at least two of the previous five years to qualify for this significant tax cut, among other requirements.
For properties used as investments, the rules are a little bit different. In addition to the net profit from the sale, you will also be responsible for paying capital gains taxes on the cumulative depreciation benefits you earned while owning the property. Depreciation recapture is the term for that procedure. The subject is too complex to cover in full here. I must make you aware that, concerning investment properties, your cost basis is probably lower than the amount you invested. Consult your professional financial planner and CPA before selling your investment property to be sure you understand the tax implications. A 1031 exchange may allow you to defer taxation if you sell one property and buy another.
