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IN THIS ISSUE

Capital Gains Tax

KEY FACTS

• Capital gains are profits from the sale of a capital asset, such as corporate stock, a business, or a home. Capital gains are generally included in taxable income, but are often taxed at a lower rate than income.
• Taxpayers may realize up to $250,000 of gains on their home tax free. Married taxpayers filing jointly may exclude up to $500,000 from tax.
• Most long-term capital gains (on assets held for a year or more) are taxed at a 5 percent rate for taxpayers in the 10 and 15 percent tax brackets and at a 15 percent rate for those in higher brackets.
• Short-term gains (on assets held for less than a year) are taxed as ordinary income.
• In 2005, 47 percent of all tax returns reporting capital gains were from households with incomes below $75,000. However, those households accounted for only 5 percent of the total capital gains reported.
• Reduced tax rates on capital gains favor the wealthy. In 2007, an estimated 92 percent of the benefit of low rates went to taxpayers with incomes greater than $200,000, and 72 percent to those earning more than $1 million.
• In 2008, the top income tax rate is 35 percent, applicable to people with taxable income above $357,700 ($178,850 for married couples filing separately). Those taxpayers face a tax rate on long-term capital gains of only 15 percent, 20 percentage points below their regular tax rate.
• Low rates on capital gains encourage tax shelters that convert ordinary income to capital gains. For top-bracket taxpayers, tax sheltering can save 20 cents per dollar of income sheltered.

Additional analysis is available in UI reports:

• Who Pays Capital Gains Tax?—Eric Toder
• Tax Policy Briefing Book: How Are Capital Gains Taxed?—TPC staff
• Tax Policy Briefing Book: What Is the Effect of a Lower Tax Rate?—TPC staff
• The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed—Leonard Burman