Over the course of the last century, there have been many changes to the capital gains tax rates and the method of reporting it in the United States. For example, the maximum capital gains tax rate back in 1919 was an astounding 73 percent, but in 2019 that figure is listed as only 37 percent. Additionally, taxpayers used to insert their capital gains and losses directly on Form 1040; however, that is not the case going forward.
Before completing your taxes this year, it is important to understand how capital gains tax works and how the new changes affect the way you file.
What Is Capital Gains Tax?
Any gain on the sale of a capital asset is taxable, and this is the basic capital gains tax definition. While you might be familiar with capital gains on real estate, there is a long list of other assets that also produce a gain when sold that are subject to capital gains taxes. They include personal and investment assets like furniture, precious metals, stocks and bonds, vehicles and major equipment.
To determine whether you have a capital gain or loss after selling a capital asset, you need to take the basis of the item (the amount you paid for it) and adjust it by adding any increases, such as improvements made on a home, or subtracting any decreases, such as depreciation. This gives you your adjusted basis. Now you need to take the amount you sold the item for and subtract the adjusted basis figure from it. The result will either be a capital gain or a capital loss.
For example, if your adjusted basis for a rental property was $150,000 and you sold the property for $200,000, then you have a capital gain of $50,000, and that gain is subject to tax. On the other hand, if you sold the same property for only $100,000, then you would have a capital loss of $50,000.
The rules for figuring capital gains tax on real estate you’ve inherited are slightly different. Instead of using the amount you bought the property for as your basis, you’ll need to use the fair market value of the property instead.
The amount you are taxed on the capital gain depends on whether you have short term versus long term capital gains.
What Is Long-Term Capital Gains Tax?
A long-term capital gain occurs when an individual receives an asset and then sells that asset for a profit at least 366 days or longer from the date of acquisition. Long-term capital gains are typically taxed at smaller rates than short-term gains. Long-term capital gains tax brackets are dependent upon your filing status and taxable income. There are only three thresholds: 0 percent, 15 percent, and 20 percent.
You can use the chart below to determine your capital gains threshold for 2019.
|Long-Term Capital Gains Tax Brackets|
|Filing Status||0% Threshold||15% Threshold||20% Threshold|
|Married Filing Jointly||$78,750 or less||$78,751 to $488,850||$488,851 and over|
|Married Filing Separately||$39,375 or less||$37,376 to $244,425||$244,426 and over|
|Head of Household||$52,750 or less||$52,751 to $461,700||$461,701 and over|
|Single||$39,375 or less||$39,376 to $434,550||$434,551 and over|
What Is Short-Term Capital Gains Tax?
You experience a short-term capital gain when you acquire a capital asset and sell it for a profit before 365 days have passed. The gain is then taxed based on your traditional tax bracket.
|Short-Term Capital Gains Tax Brackets|
|Married Filing Jointly||$0 to $19,400||$19,401 to $78,950||$78,951 to $168,400||$168,401 to $321,450||$321,451 to $408,200||$408,201 to $612,350||$612,351 and over|
|Married Filing Separately||$0 to $9,700||$9,701 to $39,475||$39,476 to $84,200||$84,201 to $160,725||$160,726 to $204,100||$204,101 to $306,175||$306,176 and over|
|Head of Household||$0 to $13,850||$13,851 to $52,850||$52,851 to $84,200||$84,201 to $160,700||$160,701 to $204,100||$204,101 to $510,300||$510,301 and over|
|Single||$0 to $9,700||$9,701 to $39,475||$39,476 to $84,200||$84,201 to $160,725||$160,726 to $204,100||$204,101 to $510,300||$510,301 and over|
Capital Gains Tax in 2019 — What’s Changed?
Previously, capital gains and losses were reported directly to IRS Form 1040 “U.S. Individual Income Tax Return” on line 13 after filling out Schedule D “Capital Gains and Losses.” This year, the 1040 has been shortened to just 23 lines, none of which include a line for capital gains and losses. Instead, taxpayers will complete Schedule D and place that total on line 13 of Schedule 1 “Additional Income and Adjustments to Income.”
Should you have a gain from a sale of stock or another security, however, you still have to fill out Form 8949 “Sales and Other Dispositions of Capital Assets” first. Then, you’ll list that total on Schedule D, which again, is reported on Schedule 1, not the 1040 as before. Your final total from Schedule 1 will be combined on line 6 of the new 1040 with the totals you recorded from lines 1 through 5.
The new 1040 and related forms were designed to make filing taxes easier. If claiming your capital gains still seems confusing, you can always call the IRS’s assistance line at 800-829-1040, utilize tax software that will guide you through the process or make an appointment with an accountant in your area for help.
More on Money
- 8 Things You Need to Know When Filing Your Tax Return This Year
- The 5 Forms You Need to Get Your Tax Refund
- The 29 Best Banks of 2019
- Watch: How to Legally Cheat Your Tax Bracket
We make money easy. Get weekly email updates, including expert advice to help you Live Richer™.