Today’s blog post is part of our 4th quarter series and will discuss some of the details associated with capital gains tax planning.

Lyle’s previous blog in this series, Understanding the U.S. Tax System Through a Simple Story, highlighted the ordinary income tax brackets. His analogy helped to clarify the reality of how our tax code works for ordinary income. Ordinary income includes wages, salaries, and interest earned and is typically taxed according to progressive tax rates.

On the other hand, capital gains taxes are handled differently.

First, let’s define capital gains, then we will discuss the best way to leverage capital gains tax planning to meet your goals.

Understanding Capital Gains Taxes

Capital gains refer to the increase in value of an asset, such as an investment or real estate, that becomes income when the asset is sold. This gain can be related to assets that are short-term, held for one year or less, or long-term, held for more than one year.

Put simply, capital gains are income generated when you sell assets at a higher price than you purchased them for initially.

The taxation on capital gains income is generally lower than that on ordinary income, especially for long-term gains, encouraging longer-term investments. This differential treatment is based on the belief that lower tax rates on capital gains provide an incentive for individuals and businesses to invest, which drives economic growth.

The fact that long-term capital gains are taxed at a lower rate compared to ordinary income provides us with our initial tax-planning strategy:

It is more tax-favorable to position investments for long-term capital gains than it is to earn interest or ordinary dividends.

In addition, our IRC (Master’s Investment Review Committee) utilizes tax-efficient portfolio design. This management strategy reduces capital gain tax exposure even more.

Leveraging Capital Gains Tax Planning

I have mentioned the favorable tax rates for capital gains several times. The long-term capital gains tax rates for the 2024 tax year are 0%, 15%, or 20%. (The higher your income, the more you will have to pay in capital gains taxes.)

Here are a few examples based on your applicable income tax bracket:

• 12% (or lower) income tax bracket – 0% tax on capital gains (non-taxable)

• 22% to 32% income tax bracket – 15% tax on capital gains
• 32% to 37% income tax bracket – 20% tax on capital gains

As you can see, the tax rates on capital gains are substantially lower than the regular (ordinary income) tax rates.

A quick word of caution; there are several situations where the more favorable capital gains rates may not apply.

The two most common would be:

• Selling an investment less than 12 months after you had purchased it.
• Selling an investment in which you had previously taken deductions for depreciation.

Expert Advice to Simplify Meeting Your Goals

The IRS and their current tax code certainly did not make this a simple, easy-to-use, do-it-yourself strategy!

This is where our team at Master’s steps into your planning process to add additional value. Utilizing some advanced tax-planning software, and the history & expertise of our team, we are happy to recommend tax-efficiency & and tax-reduction strategies for your specific financial situation.

Contact us with any questions you may have after reading this blog post. We would love to hear from you & are ready to help in any way that we can.