Long-Term Capital Gains Tax Rates in 2014

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Long-term capital gains are the profits you make when you've sold an asset you've held for at least a year. While the best way to avoid paying taxes on an asset is to not sell that asset, another way to lower your tax bill is to hold the asset for at least a year so you're taxed at long-term capital gains rates rather than the far higher short-term capital gains rates.

Let's go over how capital gains are calculated, the history of long-term capital gains tax rates, and how long-term capital gains are taxed, both federally and at the state level.

Calculating long-term capital gains

A capital gain or loss is simply the difference between what you purchased an asset for and what you sold the asset for. However, things can get more complicated if dividends were paid out, the stock split, capital was returned, or other corporate actions took place. These actions can all affect the purchase price of the stock for tax purposes, giving us the "cost basis" or "tax basis." You used to have to track all of this by yourself, but ever since 2011, brokerages have had to report cost basis information to you for shares acquired on or after Jan. 1, 2011.

While this is relatively simple for stocks you bought yourself, the rules are more complicated for other situations and other assets. If you received the asset as a gift or inheritance, you can read the IRS rules on cost basis here. For the cost basis for mutual funds, see the rules here, and to sort out the complicated matter of taxation on master limited partnerships, you can read this article.

So what are the long-term capital gains taxes for this tax year?

Federal long-term capital gains tax rates for 2014

The long-term capital gains rate is based on the tax bracket you fall into. Note that your tax bracket is also the rate at which your short-term capital gains are taxed, so in a way.

Tax Bracket

Long-Term Capital Gains Rate







Source: IRS.

There are three important things to note. First, if your long-term capital gains take you into a higher tax bracket, only the gains above that threshold will be taxed at the higher rate. In other words, if your long-term capital gains bring your taxable income $1 over the level for the 25%-35% bracket, only $1 will be taxed at 15%, and the rest of your long-term capital gains will be taxed at 0%.  

Second, for single taxpayers who make more than $200,000 per year and married taxpayers who file jointly and earn more than $250,000, there is an additional 3.8% tax on investment income, including capital gains, above a certain level because of the net investment income tax. If this applies to you, look here for a useful explanation of the tax.

Third, there are separate capital gains rates for certain categories, including sales of collectibles, precious metals, commercial buildings, and small-business stock.

Long-term capital gains tax rates by state

Investors also need to think about state capital gains taxes. On average, states add 5 percentage points to the capital gains tax rate. The following chart shows the top marginal capital gains tax rate in each state.

Your state capital gains tax rate in 2014 will depend not only on your tax bracket but also on whether your state allows deductions for federal capital gains taxes or has other special rules.

Keep watching Fool.com for more tax news, as well as strategies for saving yourself money when Uncle Sam comes calling.

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The article Long-Term Capital Gains Tax Rates in 2014 originally appeared on Fool.com.

Find Dan Dzombak on Twitter @DanDzombak, on his Facebook page DanDzombak, or on his blog, where he writes about investing, happiness, life, and success. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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