How capital gains work.
When you sell an asset at a price higher than you paid to acquire it, the profit is referred to as “capital gains.” If you owned the asset for one year or less, the capital gains are considered “short term.” Capital gains on assets that are sold after you’ve owned them longer than one year are considered “long term.” Short-term gains and long-term gains are taxed at different rates.
Long-term capital gains.
A capital gains tax rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $415,050 ($466,950 for married couples filing jointly).
Taxpayers whose taxable income falls in the top 39.6% ordinary tax bracket ($415,050 for single filers; $466,950 for married couples filing jointly or qualifying widow[er]s in 2016) are taxed at the top capital gains tax rate of 20%.
Taxpayers with income below the 25% marginal bracket pay no federal tax on long-term capital gains.
Short-term capital gains:
Appreciated assets held for less than a year receive no special treatment and are taxed at your ordinary income tax rate.
Net investment income tax.
Another tax to be aware of is called the net investment income tax is a tax of 3.8% on certain net investment income and applies to single filers whose modified adjusted gross income (AGI) exceeds $200,000 per year, and married couples filing jointly whose AGI exceeds $250,000 per year. In effect, this means a top ordinary federal tax rate of 43.4% and a top federal long-term capital gain tax rate of 23.8%
How dividends work.
In simple terms, dividends are your share of the profits made by a company in which you own stock. The board of directors of a company can choose to distribute a portion of the company’s earnings to a class of its shareholders. Dividends can be issued as cash payments, shares of stock, or other property.
When dividends are issued to you, they’re typically considered taxable income.
Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. They are paid out of earnings and profits and are treated as ordinary income. This means they are not capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise.
Qualified dividends are ordinary dividends paid during the tax year by domestic corporations and qualified foreign corporations. which you held for at least a specified period of time. These dividends are subject to the same 0%, 15%, or 20% maximum tax rate that applies to long-term capital gains. They will be shown in box 1b of the Form 1099-DIV you receive.
2016 tax rates.
When viewing the table below, remember that short-term gains are taxed at the same rate as your ordinary income.
Married filing jointly / Qualifying widow or widower
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Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. Schwab does not provide legal or tax advice.
Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.