In George Orwell’s allegorical novella, Animal Farm, the animals overthrow the debauched farmer Jones, seize control of the farm, and declare a set of principles, the chief of which is, “All animals are equal.” However, a hierarchy soon develops and the pigs, which are in control, change the first principle to: “All animals are equal but some animals are more equal than others.”
Capital-gain tax rates, like Orwell’s animals, are more unequal than they have ever been. This imbalance results from the combination of the American Taxpayer Relief Act (ATRA), which raised the capital-gain tax rate on securities and non-depreciated real estate from 15% to 20% for taxpayers in the highest income-tax bracket; and the Affordable Care Act, which beginning in 2013 imposed a 3.8% surtax on the investment income of those whose adjusted gross income (AGI) exceeds certain thresholds. Those thresholds are $200,000 for single individuals and $250,000 for married couples filing jointly.
The following shows the capital-gain tax rates applicable to various categories of taxpayers.
Capital-Gain Tax Rates Based on Taxpayer Situation
0% for tax brackets of 10% and 15%
15% for tax brackets of 25%, 28%, 33% and 35% but
18.8% if AGI above threshold
20% for tax bracket of 39.6% but
23.8% if AGI above threshold
25% for capital gain resulting from depreciation in real estate but
28.8% if AGI above threshold
28% for capital gain resulting from tangible personal property but
31.8% if AGI above threshold
Note: Taxpayers in the 25% and 28% tax brackets are less likely to have AGI above the thresholds, though they might depending on deductions and exemptions. Those in the 39.6% tax bracket will undoubtedly exceed the AGI threshold.
Effect on Charitable Gifts
The higher capital-gain tax rates generally increase the tax savings from contributions of appreciated property. Suppose, for example, that you are in the 33% tax bracket, that your AGI makes you subject to the surtax, and that you contribute stock having a value of $10,000 and a cost basis of $2,000. Previously, your combined tax savings would have been $3,300 ($10,000 x 33%) plus $1,200 (15% capital-gain rate x $8,000 of gain), which totals $4,500. Now those tax savings will be $3,300 plus $1,504 (18.8% capital-gain tax rate x $8,000 of gain), which totals $4,804.
Thus as you plan your 2013 charitable gifts, give particular attention to appreciated property that you have considered selling and which you might be willing to contribute instead, either outright or for a plan that pays you income.