The capital gains tax rates are determined by the type of investment asset and the holding period of the asset.
In additional to the federal capital gains tax rates, your capital gains will also be subject to state income taxes. Many states do not have separate capital gains tax rates. Instead, most states will tax your capital gains as ordinary income subject to the state income taxes rates.
Tax Rate on Short-Term Capital Gains
Capital gain income from assets held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%.
Tax Rate on Long-Term Capital Gains
Capital gain income from assets held longer than one year are generally taxed at a special long-term capital gains rate. The rate that applies depends on which ordinary income tax bracket you fall under.
* Zero percent rate if your total income (including capital gain income) places you in the ten or fifteen percent tax brackets.
* 15% rate if your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher.
Tax Rate on Dividend Income
Dividends are classified either as ordinary dividends or as qualified dividends. Ordinary dividends are taxed at your ordinary tax rates for whatever tax bracket you are in. Qualified dividends are taxed at a 15% percent rate. To be eligible as a qualified dividend, the dividends must be from a domestic corporation or a qualifying foreign corporation and you must hold the stock "for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date." (Publication 550.)
Tax Rate on Collectible Assets
Collectibles held longer than one year are taxed at a 28% rate. Short-term gains on collectibles are taxed at the ordinary income tax rates.
Tax Rate on Recaptured Depreciation of Real Property
Real property that has been depreciated is subject to a special depreciation recapture tax. A special 25% tax rate applies to the amount of gain that is related to depreciation deductions that were claimed or could have been claimed on a property. The remainder of the gain will be ordinary or long-term gains, depending on how long the property was held.
Planning Ahead for 2013
The special tax rates on long-term gains and qualified dividends will expire on December 31, 2012. Starting 2013, the tax rate on long-term gains will be 20% (or 10% if a taxpayer is in the fifteen percent tax bracket). Also starting in 2013, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates.
