By: Chris J. Roe, CPA/PFS
Classic investments, like stocks, are not the only investments taxed by capital gains. Capital gains taxes can apply to any other property that acquires value over time. These 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. But, the final amount can be taxed at different rates depending on the investment type and total monetary gain.
Below we’re reviewing how capital gains taxes are determined and what methods physicians can use to reduce them.
Capital Gains Tax Rates
The total tax amount will depend on a variety of factors, though the IRS taxes most individuals at a rate of zero to 15 percent.
Here are a few factors that determine capital gains tax rates:1
- A total income of less than $78,750 is set at zero percent.
- A rate of 15 percent is set if your income is between $78,750 and $434,550, but this range will change depending on your marriage filing status.
- Rates higher than 20 percent result from certain investment types and income amounts surpassing the 15 percent range.
Make sure to check with the IRS to understand how different investments are taxed.
Duration of the Investment
The amount of time you hold an investment can reduce the amount of taxes you ultimately pay. The IRS has established two investment types: short-term and long-term.1 Investment duration is calculated from the day of purchase to the day of sale - over a year is considered long-term, while short-term is under a year.1
What Isn’t Affected by Capital Gains?
Certain types of property and accounts are not affected by capital gains taxes. If applicable, see if you can utilize these property and account types to maximize your investment.
There are two general property types unaffected by capital gains. The first is business property, including products. The second is anything you create as a physician. This may be a medical textbook or medical invention you patent.
Alternatively, specific retirement and education accounts can help protect your investment from capital gains taxes, such as a Roth IRA.
Offsetting Capital Gains & Maximizing Low Tax Rates
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. However, if you 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
In addition to capital loss planning an opportunity exists if you are in a tax bracket with a 0% capital gains rate. If in the 0% capital gains bracket, you should consider claiming capital gains and resetting your investment's income tax basis. This will save you money in the future when you are in a higher capital gains tax bracket. This opportunity may be particularly important to resident physicians who may have investments outside of their retirement accounts.
Capital gains taxes can be postponed by using the income to invest in a similar property type.2 However, 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.
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 CPA to help determine how much you could be taxed.
2021 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Twenty over Ten and Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice. Please consult legal, financial or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any financial advice or investment security.