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.

Capital gains tax rates apply to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for IRC 1250 depreciation recapture).

For example:

A married couple with $480,000 of wages plus an additional $100,000 in long-term capital gains and qualified dividends:
The entire $100,000 is subject to the 20% rate and the 3.8% Net Investment Income Tax.
Whereas a married couple with $300,000 of taxable income plus $100,000 in long-term capital gains and qualified dividends:
The entire $100,000 is subject to the 15% rate and the 3.8% Net Investment Income Tax.

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) $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 dividends.

Ordinary (taxable) dividends are the most common type of dividend distribution from a corporation or mutual fund. Dividends are paid out of earnings and profits so they are treated as ordinary income. This means they are not capital gains. Subsequently any dividend you receive on is assumed to be an ordinary dividend unless the paying corporation or mutual fund tells you otherwise.

Qualified dividends.

Qualified dividends are dividends paid during the tax year by domestic corporations and qualified foreign corporations (a holding period applies to receive qualified dividend status). These dividends are subject to the same 0%, 15%, or 20% tax rate that applies to long-term capital gains. They will be shown in box 1b of the Form 1099-DIV you receive.

In addition to the capital gains tax rates, your investment income could also be subject to the 3.8% Net Investment Income Tax.

2018 Short-Term Capital Gains Tax Rates and Brackets

When viewing the table below, remember that short-term gains are taxed at ordinary tax rates.

Single Filers

2018 Tax Rates on Short-Term Capital Gains From To
10% $0 $9,325
12% $9,326 $37,950
22% $37,951 $91,900
24% $91,901 $191,650
32% $191,651 $416,700
35% $416,701 $418,400
37% $418,401 --------

Joint Filers

2018 Tax Rates on Short-Term Capital Gains From To
10% $0 $19,050
12% $19,051 $77,400
22% $77,401 $165,000
24% $165,001 $315,000
32% $315,001 $400,000
35% $400,001 $600,000
37% $600,001 --------

2018 Long-Term Capital Gains Tax Rates and Brackets

In addition to the capital gains tax rates, your investment income could also be subject to the 3.8% Net Investment Income Tax.

Single Filers

2018 Tax Rates on Long-Term Capital Gains From To
0% $0 $38,600
15% $38,601 $425,800
20% $425,801 --------

Joint Filers

2018 Tax Rates on Long-Term Capital Gains From To
0% $0 $77,200
15% $77,201 $479,000
20% $479,001 --------

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