Maybe 2023 is the year you finally sell your home and downsize to a condo at the beach. Maybe you’ll sell some pricy collectibles this year and contribute to a child’s college savings fund. Or maybe you’re embracing the “die with zero” philosophy and you’re going to cash out some investments so you can start enjoying your money now. A lot of the big financial decisions that you make this year could incur capital gains, making the capital gains rate an important factor in your financial plans for 2023.
Here’s a look at where things currently stand with capital gains tax rates, what’s changed in Massachusetts specifically, and what to expect as you think about tax planning for the year ahead.
ARE CAPITAL GAINS TAXES CHANGING IN 2023?
Capital gains tax rates have been the subject of a lot of political maneuvering and debate over the last several years. To refresh your memory, President Biden campaigned on a tax plan that included taxing capital gains as ordinary income for individuals earning more than $1 million. Once elected, he proposed a new top income tax rate of 39.6 percent as part of his American Families Plan. (This would have reversed a change made by the Tax Cuts and Jobs Act (TCJA), which in 2018 lowered the top income tax rate from 39.6 to the current rate of 37 percent.)
At the same time, President Biden repeated his proposal that taxpayers earning more than $1 million pay a capital gains rate equaling their income tax rate. That would have effectively doubled the top capital gains rate for those taxpayers, from 20 percent to 39.6 percent. With the additional 3.8 percent Net Investment Income Tax (NIIT), wealthy individuals would have paid a top marginal tax rate of 43.4 percent on capital gains.
However, those proposals didn’t receive the support necessary to move forward and become law. So, in 2023 the federal capital gains rates remain the same as in previous years: individuals pay either 0, 15 or 20 percent on long-term capital gains. (Short-term capital gains, earned from selling an asset that you’ve owned less than a year, continue to be taxed as ordinary income.)
WHAT’S COMING FOR CAPITAL GAINS BEYOND 2023?
Federal capital gains taxes could become a contested issue again as soon as the 2024 presidential race begins in earnest. It will also be interesting to see whether any provisions of the TCJA are extended, or whether they’ll expire in 2025 as planned.
The TCJA didn’t make sweeping changes to the way capital gains are treated or change the tax rates for capital gains. What the TCJA did change were the criteria used to determine an individual taxpayer’s capital gains rate. Prior to 2018, capital gains rates were tied to income tax brackets. The TCJA established its own income thresholds for the 0, 15 and 20 percent tax categories (see chart below). The expiration of the TCJA’s provisions could mean reverting back to the previous system tying capital gains to tax brackets.
The end of the TCJA could also affect planning around short-term capital gains. If income tax rates rise to their pre-2018 levels, high-earning individuals could pay even more in taxes when selling capital assets within a year of owning them.
UPDATED FEDERAL CAPITAL GAINS RATES FOR 2023
The income thresholds determining what tax rate you’ll pay on capital gains are updated every year. If you’re thinking about selling any capital assets in the year ahead, these are the long-term federal capital gains rates for tax year 2023:
||Married, filing jointly
||Head of Household
||$0 to $44,625
||$0 to $89,250
||$0 to $44,625
||$0 to $59,750
||$44,625 to $492,300
||$89,250 to $553,850
||$44,625 to $276,900
||$59,750 to $523,050
WHAT ABOUT CAPITAL GAINS TAXES IN MASSACHUSETTS?
Massachusetts residents have additional considerations around capital gains in addition to the federal tax rates. The Commonwealth levies a 12 percent tax on short-term capital gains and a 5 percent tax on long-term capital gains. These rates remain unchanged for most Massachusetts taxpayers in 2023.
But the enactment of the so-called “millionaire tax” will raise capital gains taxes for wealthy individuals in 2023. Massachusetts voters passed Question 1 in the 2022 election, approving the creation of an additional 4 percent tax on any income that exceeds $1 million.
For taxpayers who earn more than $1 million in a given tax year, this means that short-term gains could be taxed at as much as 16 percent and long-term gains at 9 percent on income in excess of $1 million. Obviously, those are very significant increases over 2022 rates. Going forward, wealthy Massachusetts residents will benefit from doing some additional strategizing with their tax advisors around capital gains planning to minimize the impact of the millionaire tax.
Even if you’re nowhere close to a millionaire (yet), capital gains planning is still something that requires forethought and careful strategizing. Save spontaneity for other areas of your life, and talk to your advisors before making any decisions about selling capital assets.
Sachetta, LLC’s tax advisors are here to help you understand capital gains rates, strategize about timing the sales of any capital assets and answer any other tax planning questions that come up for you. How can we help you avoid unexpected capital gains taxes and make the most of your money this year? Contact us today.