Retirement Tips Seniors Will Need If the Capital Gains Tax Changes


Have you heard of the proposed tax changes on the horizon with long term capital gains tax rates being a big focal point? Currently, the top capital gains tax rate is 23.8%. This number is reached by adding the 20% top capital gains tax rate and a 3.8% surcharge on the highest earners intended to fund the expansion of the Affordable Care Act. Let us discuss what seniors need to know about their retirement savings if the long-term capital gains tax rate changes soon.

1. Find Out What Your Tax Rate Will Be. Under the proposed plan, the top long term capital gains tax rate would be the 39.6% tax rate currently imposed on the highest wage earners for ordinary income, plus the 3.8% surcharge, for a total top rate of 43.4%. This top rate would apply to individuals with greater than $1 million in income annually. Right now, the top long term capital gains tax rate of 23.8% applies to individual taxpayers with $445,850 of annual income or married taxpayers with $501,600 of annual income. The additional 3.8% surcharge kicks in at a lower level, for individual taxpayers with $200,000 in annual income or married couples with $250,000. Since there is a big gap between earnings of roughly $500,000 and $1 million, seniors may need to pay careful attention to what their long-term capital gains tax rate might be if they fall somewhere in the middle of that number.

2. Know the Difference in Retirement Account Tax Rates. It may be time to look at your brokerage and retirement accounts carefully. If you invested any money in a Roth IRA or Roth 401(k) plan when you were younger and earning less, that money can be withdrawn free of tax. Money you draw from a regular IRA or 401(k) plan, however, is subject to income tax, so the new tax rates may change how much you pay in tax on that income. You may make different decisions on taking out more than the mandatory minimum distribution in anticipation of a tax rate increase.

3. Think About Big Ticket Items. If you have a large asset you were thinking of selling soon, now may be the time to sell, before the proposed increased capital gains tax rates kick in. Even if the rates do not increase to the highest amount proposed, it is likely some sort of increase is coming, although the number may fall somewhere in between what we have now and what has been put on the table. If you are already retired, you may want to take action now to simplify things. Otherwise, many tax advisors are advising their clients, including seniors, to sit tight until we have more clarity. 

For assistance navigating these potential changes on the horizon, please reach out to our office to schedule a meeting.