CAPITAL GAINS AND DIVIDEND TAXATION

Capital Gain and Dividend Taxation

Browsing through one’s 1099 at the end of the year can be a humbling experience for even the most seasoned investor. With tax season firmly behind us, it’s a prudent time to reflect on a topic that often causes confusion and headaches – capital gains and dividend taxes. Capital gains tax rates play a pivotal role in determining the tax liability for investors engaged in various forms of investment activities, and should be well understood when creating a strategy. At its most basic form, capital gains are the profits realized from the sale of assets such as stocks, bonds, real estate, or other investments. The tax rates applied to these gains differ based on the duration for which the assets were held and the nature of the income.

Long-Term vs. Short-Term Gains: 

One of the fundamental distinctions in capital gains taxation lies in the classification of gains as either long-term or short-term. Long-term capital gains stem from the sale of assets held for more than one year, whereas short-term capital gains come from assets held for one year or less. The disparity in tax treatment between these two categories is substantial.

Long-term capital gains typically benefit from more favorable tax rates compared to short-term gains. In 2024, long-term capital gains are subject to tax rates ranging from 0% to 20%, depending on the individual’s taxable income bracket (see chart below). For taxpayers in the higher income brackets, an additional 3.8% Net Investment Income Tax (NIIT) may apply, leading to a maximum effective rate of 23.8% on long-term capital gains.

 

Long-Term Capital Gain Rate

Single Taxpayers

Married Filing Jointly

 

0%

 

 

Up to $47,025

 

 

Up to $94,050

 

15%

 

 

$47,026-$518,900

 

 

$94,051-$583,750

 

 

20%

 

 

Over $518,900

 

 

Over 583,750

 

*For more 2024 tax brackets, see our Tax Facts at a Glance

In contrast, short-term capital gains are taxed at ordinary income tax rates, which can be significantly higher than the rates applied to long-term gains. These rates are based on the taxpayer’s income tax bracket, ranging from 10% to 37%, with the possibility of additional state taxes depending on residency.

Qualified vs. Ordinary Dividends:

Dividend income also faces different tax treatment based on whether it’s classified as qualified or ordinary dividends.

Qualified dividends are those paid by U.S. corporations or qualified foreign corporations that meet specific IRS criteria. These dividends are taxed at the same preferential rates as long-term capital gains, with rates ranging from 0% to 20%, depending on the taxpayer’s income bracket.

Ordinary dividends, on the other hand, are subject to taxation at the individual’s ordinary income tax rates. They are typically derived from sources such as interest income, non-qualified dividends, or other investment income.

Treatment of Losses: 

Capital losses incurred from the sale of assets can offset capital gains, thereby reducing the overall tax liability. If capital losses exceed capital gains, taxpayers can utilize up to $3,000 of those losses to offset other income, such as wages or salary. Any excess losses beyond this limit can be carried forward to future tax years to offset capital gains and income in those years.

 

 

*Equitable Advisors, its affiliates and Financial Professionals do not provide tax or legal advice. Please consult your tax and/or legal advisors regarding your particular circumstances.

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