How Do I….Compute the new 20 percent net capital gain rate under the new tax law?

Beginning in 2013, the capital gains rates, as amended by the American Taxpayer Relief Act of 2012, are as follows for individuals:

  • A capital gains rate of 0 percent applies to the adjusted net capital gains if the gain would otherwise be subject to the 10 or 15 percent ordinary income tax rate.
  • A capital gains rate of 15 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 25, 28, 33, or 35 percent ordinary income tax rate.
  • A capital gains rate of 20 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 39.6 percent ordinary income tax rate beginning after December 31, 2012.

Individuals are subject to the 39.6 percent ordinary income tax rate beginning in 2013 to the extent their taxable income exceeds the applicable threshold amount of $450,000 for married individuals filing joint returns and surviving spouses, $425,000 for heads of households, $400,000 for single individuals, and $225,000 for married individuals filing separate returns.

Comment:  The only change from 2012 rates is the 20 percent rate, applied as described, above.  Prior to 2013, the highest tax rate on net capital gain was 15 percent.

Comment: Adjusted net capital gain is net capital gain from capital assets held for more than one year other than unrecaptured Code Sec. 1250 gain (25 percent); collectibles gain (28 percent) or gain from qualified small business stock (varying rates).

Examples

Following the rules outlined above, computations for higher-income taxpayers (those whose taxable income together with net capital gains exceed the 39.6 percent tax bracket threshold amounts, which are also the threshold amounts for the 20 percent capital gain rate) are illustrated under three scenarios:

Example 1: Assume in 2013, joint filers with $475K in net capital gain and $200K in ordinary income:

  • $200K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $43,465.50 tax.
  • $475K capital gain is taxed:
    • $250K of $475 net capital gain at 15 percent ($450K threshold less $200K ordinary income) = $37,500
    • The remainder of the net capital gain $225K ($475K less $250K that was taxed at 15 percent) is taxed at 20 percent = $45,000

Total tax liability: $43,465.50 on $200K ordinary income and $82,500 on $475K net capital gain.

Example 2: Assume in 2013, joint filers with $200K in net capital gain and $475K in ordinary income:

  • $475K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $135,746 tax.
  • $200K capital gain is taxed:
    • All of $200K net capital gain at 20 percent ($450K threshold already exceeded by $475K in ordinary income) = $40,000.

Total tax liability: $135,746 on $475K ordinary income and $40,000 on $200K net capital gain.

Example 3: Assume in 2013, joint filers with $50K ordinary income and $425K in net capital gain:

  • $50K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $4,845
  • $425K net capital gain is taxed:
    • $20,700 at zero percent ($70,700, which is the top of the 15 percent bracket less $50K ordinary income) = $0
    • $379,300 at 15 percent ($450,000 less $70,700) = $56,895
    • $25,000 at 20 percent (balance of ordinary income plus capital gain over $450K threshold) = $5,000.

Total tax liability: $4,845 on $50K ordinary income and $40,000 on $200K net capital gain.

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Content provided by CCH. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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