2020-2021 Capital Gains and Dividend Tax Rates | Sidnaz Blog

In brief 
  • Long-term capital gains are net profits on investments held longer than a year. There are three tax rates—0%, 15% and 20%—and they apply at different taxable income levels depending on your filing status.  
  • Short-term capital gains are net profits on investments held for a year or less. They are taxed at the same rates as ordinary income. 
  • For single filers with an adjusted gross income (AGI) of more than $200,000 and most couples filing jointly with an AGI above $250,000, there is an additional surtax. 
  • Some investors owe no taxes on their capital gains and dividends. 

For investors using taxable accounts—as opposed to tax-sheltered retirement accounts such as IRAs or 401(k)s—the tax law has special rules that offer benefits and pitfalls. Congress hasn’t changed these rules recently. 

Capital gains and losses

When an investor sells a holding in a taxable account, the capital gain or loss is the difference between the original cost (plus adjustments) and the selling price. So if someone bought a share at $3 and sold it for $5, the capital gain is $2. If the investor bought another share for $3 and sold it for $2, the capital loss is $1. 

A key benefit is that capital losses can offset taxable capital gains. So if the investor above sold both shares in the same year, she would have a net taxable gain of $1 instead of $2 for that year. If total losses exceed total gains, the extra losses can offset up to $3,000 of income such as wages for that year. Unused capital losses carry forward into future years to offset gains. 

Long-term capital gains are net profits on investments held longer than a year. Short-term capital gains on investments held a year or less are taxed at the same rates as ordinary income, an important distinction day traders should note.  

Dividend tax rates and the 3.8% surtax

The favorable tax rates for dividends apply to those that are “qualified,” which most are. Nonqualified dividends are taxed at ordinary-income rates. 

However, a 3.8% surtax applies to net investment income for most single filers whose adjusted gross income (AGI) exceeds $200,000 and most couples filing jointly with AGI above $250,000. This surtax applies only to the amount of net investment income above those thresholds. 

For example, if a single filer has $150,000 of ordinary income plus a $50,000 taxable long-term gain plus $25,000 of qualified dividends, then $25,000 would be subject to the 3.8% surtax. 

As a result, top-bracket taxpayers typically owe 23.8% instead of 20% on their long-term gains and dividends. Some investors in the 15% bracket for this income owe the 3.8% surtax on part or all of them because their adjusted gross income is above the $250,000/$200,000 thresholds. 

Say that David is a single filer with $210,000 of adjusted gross income, and $50,000 of that is a windfall from a long-term gain on an investment and some qualified dividends. In that case, David’s investment income would likely be taxed at a 15% rate, but he would owe an extra 3.8% on $10,000 because that is the amount of investment income above $200,000 of AGI. Thus his tax rate on the $10,000 would be 18.8%.  

Key inflation-adjusted tax numbers for capital gains and dividends, 2020

Up to $40,000

$40,001–$441,450

$441,451+

Up to $80,000

$80,001–$496,600

$496,601+

Key inflation-adjusted tax numbers for capital gains and dividends, 2020

Up to $40,000

$40,001–$441,450

$441,451+

Up to $80,000

$80,001–$496,600

$496,601+

Key inflation-adjusted tax numbers for capital gains and dividends, 2020

Up to $40,000

$40,001–$441,450

$441,451+

Up to $80,000

$80,001–$496,600

$496,601+

Key inflation-adjusted tax numbers

for capital gains and dividends, 2020

Up to $40,000

$40,001–$441,450

$441,451+

Up to $80,000

$80,001–$496,600

$496,601+

Key inflation-adjusted tax numbers for capital gains and dividends, 2021

Up to $40,400

$40,401–$445,850

$445,851+

Up to $80,800

$80,801–$501,600

$501,601+

Key inflation-adjusted tax numbers for capital gains and dividends, 2021

Up to $40,400

$40,401–$445,850

$445,851+

Up to $80,800

$80,801–$501,600

$501,601+

Key inflation-adjusted tax numbers for capital gains and dividends, 2021

Up to $40,400

$40,401–$445,850

$445,851+

Up to $80,800

$80,801–$501,600

$501,601+

Key inflation-adjusted tax numbers

for capital gains and dividends, 2021

Up to $40,400

$40,401–$445,850

$445,851+

Up to $80,800

$80,801–$501,600

$501,601+

How the zero rate on investment income applies

Some people owe no taxes on their capital gains and dividends after a sale. Here is a simplified example. Say that Janet is a single taxpayer with $30,000 of taxable ordinary income for 2020 after deductions and exemptions, such as for tax-free municipal-bond interest or the sale of her home. Her taxable income is subject to regular rates up to 12%, as detailed in the income-tax brackets. 

But Janet also has a $20,000 long-term capital gain, and it “stacks” on top of her $30,000 of taxable income for a total taxable income of $50,000. For 2020, the 15% bracket for capital gains begins at $40,000 of taxable income for single filers. As a result, Janet would owe zero tax on $10,000 of her gain and 15% on the remaining $10,000. 

This year’s tax deadline for individuals is May 17. Interested in knowing more before you file your taxes? Register for free to download your complimentary copy of the WSJ Tax Guide 2021.

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


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