For tax rates on capital gains and qualified dividends, the 2012 Act largely left intact the existing tax rates applied to long term capital gains and qualified dividend income that existed through the end of 2012, with an increase for high income individuals.
Prior to the 2012 Act, capital gains and qualified dividend income was taxed at 15% with the possibility of a lower rate. The tax rate was applied to “adjusted net capital gain” which is net capital gain plus qualifying dividend income. The rates in effect for 2012 were:
- 0% to the extent adjusted net capital gain would be taxed at a rate below 25% if it were ordinary income, or
- 15% on adjusted net capital gain in excess of any amount taxed at 0%.
Note however, that there are other capital gains rates that were not subject to those rates. In particular, there is a 28% capital gain rate imposed on gain on the sale of most collectibles and the unexcluded part of gain Code Section 1202 small business stock. Also, on the sale of real estate, the capital gain rate is 25% on unrecaptured Section 1250 gain which is essentially the portion of the gain attributable to real estate depreciation. Those rates were not affected by the new law and remain.
The 0% and 15% capital gain rates were scheduled to sunset at the end of 2012
The 2012 Act removes the sunset provision allowing the 0% and 15% capital gain rates cited above to remain in place permanently. The 2012 Act also adds a new 20% capital gain rate for high income taxpayers, meaning taxpayers with taxable income above $450,000 for joint filers and surviving spouses, $425,000 for heads of households, $400,000 for single filers, and $225,000 for married taxpayers filing separately.
In summary, the tax rate on capital gains and qualifying dividends in effect for years beginning in 2013 are:
- 0% on gain that would otherwise be taxed at a 10% or 15% rate;
- 15% on gain that would otherwise be taxed at a 25%, 28%, 33% or 35% rate; and
- 20% on gain that would otherwise be taxed at a 39.6% rate (39.6% rate applies to the incomes noted above.
Note, although enacted and made part of the Internal Revenue Code several years ago, the 3.8% tax on net investment income that was made law in 2010 applies beginning in 2013. This 3.8% tax applies to taxpayers whose modified adjusted gross income exceeds $250,000 for joint return filers and surviving spouses, $125,000 for separate returns and $100,000 in all other cases. This means that the capital gain rate for some high income taxpayers (those whose income would be otherwise taxed at the 39.6% rate) will be 23.8% (the 20% capital gain rate plus the 3.8% rate). In fact, there is a middle rate for some taxpayers who will not yet be subject to the higher capital gain rate, for example, a couple filing jointly with income under $450,000 but who will be subject to the tax on net investment income (because their adjusted gross income exceeds $250,000. These taxpayers will have capital gain rate of 18.8% (15% plus 3.8%).