The way capital gains tax rates are figured depends on your client’s income (which puts you in a tax bracket) and the length of the holding periods for their investments (including stocks, bonds, and mutual funds. There is a higher tax rate for real estate, business property, etc.) The tax bracket is determined by figuring out your client’s net income for the year. If they are in the 15% tax bracket, they pay lower taxes. If your client is in the 28% tax bracket or higher they pay almost twice in taxes.
If your client is in the 15% tax bracket, your client pays 15% capital gains tax on short term investment gain (assets held for less than one year.) They pay 10% capital gains taxes on long term investments (assets held for more than one year.)
If your client is in the 28% tax bracket, they pay 39.6% capital gains tax on short-term investments and 20% capital gains tax on long-term investments. It doesn’t take a genius to realize that the tax jumps twice in percentage between the two brackets. But a little common sense on your client’s part in making their investments will make the real difference in how much Uncle Sam gets from them.
So help your client be a savvy investor and advise them to make more long-term investments than short ones.
