Retirement Tips Seniors Will Need If the Capital Gains Tax Changes

Have you heard of the proposal currently going through Congress to change the capital gains tax rate? While the news may be circulating among tax professionals and investors, it may also be important to find out exactly what changes are on the table and how they might impact you, especially if you are a senior and you rely on investment income to cover your annual expenses. Let us review three tips that seniors will need if the capital gains tax rate changes.

1. Figure Out Your Current Capital Gains Tax Rate. Before you start to worry about potential capital gains tax rate changes, consider finding out how much you actually pay right now. Current long-term capital gains are taxed at 15% for single taxpayers whose annual income is between $40,401-445,850 and married taxpayers whose income is between $80,801-$501,600. The rate rises to 20% over those thresholds. Then, a 3.8% surcharge is added to the tax rate for individuals earning $200,000 or more per year, and married couples earning $250,000 or more per year. The surcharge is meant to fund the expansion of the Affordable Care Act. What this means is, if you are an individual taxpayer, for example, a widowed senior, divorced, or never-married, you pay 18.8% tax on long-term capital gains if you have $200,000-$445,850 in annual income, or 23.8% if you earn more than that annually. If you are married filing jointly, you pay 18.8% tax if you have $250,000-$501,600 in annual income, or 23.8% if you earn more than that annually.

2. Understand the New Proposed Rates. Much of the splash in the media concerns the proposed highest long term capital gains tax rate, which is to be set at 43.4%. This number is reached by adding the 39.6% ordinary income tax rate paid by the highest earners to the 3.8% surcharge. The proposal, however, is that this rate should be paid only by those who earn over $1 million annually. For those who earn under that amount, the capital gains rate would also be pegged to ordinary income tax rates.

3. Make Sense of Possible Changes. Let us take a look at an example. Currently, a married couple earning $300,000 in annual income is in the 24% ordinary income tax bracket. Long-term capital gains are taxed at 18.8% because the household income is above $250,000 and under $501,600. Under the new proposal, this household’s capital gains tax rate would rise to 27.8%, which adds the 24% ordinary income rate to the 3.8% surcharge. While this is an increase, it is nowhere near the increase at the top of the tables. So it is critical for seniors to consult a financial advisor to determine whether making any changes is advisable.

Do you have questions about how you can protect yourself and your retirement savings from the proposed capital gains tax increase? Contact our office to set up an appointment today.