Capital Gains Tax for People Over 65

Capital gains taxes get levied on profits generated when you sell an asset for more money than you paid for it. Assets can be anything from stocks and bonds to real estate, jewelry, cars and collectibles like art or coins.

Because many people finance some of their retirement by selling assets they accumulated, learning how to make capital gains taxes work to your advantage can be an important aspect of retirement planning.

There are two primary types of capital gains: realized and unrealized. You only pay taxes on realized capital gains.

Realized capital gains are profits from the sale of assets. For example, if you sell a $100 stock that doubled in price (to $200) while you owned it, you have $100 in realized capital gains. At the end of the year, you’ll owe capital gains tax on that $100.

Unrealized capital gains are profits from assets you still own. For example, if you purchased a vacation home for $200,000 and now it’s worth $400,000, you have $200,000 in unrealized capital gains. But because you still own it, you won’t owe any tax on that $200,000 gain. You will owe capital gains taxes after you sell it, assuming you sell it for a profit.

The IRS also divides capital gains into two subcategories: short-term gains and long-term gains.

Short-term gains are profits from assets owned for less than a year. An example is income made from day-trading stocks.

The IRS taxes short-term capital gains more heavily than long-term gains. Depending on your income, you could pay as much as 37% on short-term gains. IRS data shows retirees are unlikely to have many short-term capital gains to worry about.

Long-term gains come from profits on assets owned for longer than one year. An example of this is the profits realized from selling a house that you owned for 20 years.

Many of the assets you’ll use to fund your retirement will provide long-term gains. These profits get taxed at a maximum rate of 20%, making them potentially more lucrative than their short-term counterparts.

The IRS considers retirement accounts assets, but the most common types of retirement accounts don’t incur capital gains taxes.

However, you will pay capital gains taxes on the sale of stocks and mutual funds that are not part of a designated retirement account.

Unlike the OASDI tax, you don’t benefit from paying more capital gains tax. You’ll want to minimize the amount of these taxes as much as possible, especially if your income declines during retirement.

Your capital gains tax rate depends on your income during the year in which gains were realized. According to current IRS regulations, the higher your income, the more you pay. Rates vary for single people, married people and heads of households. Capital gains tax rates are currently capped at 20%.

The tax rate on short-term gains is the same as your ordinary income tax rate. This could be anywhere from 0% to 37%, depending on your income.

It’s a good idea to pre-calculate how much you’ll owe in capital gains taxes anytime you sell an asset. Armed with this information, you can set aside some proceeds to pay the tax at the end of the year.

Once you determine your capital gains tax status, you’ll have to report any gains (or losses) on your annual federal tax return. The realized gains get placed on Schedule D of your return. You’ll also have to supply any relevant supporting documentation.

If your retirement plan includes selling any of your assets, you’ll likely owe capital gains taxes at some point. That’s why it’s a good idea to speak to a tax professional when you start planning (and saving) for retirement.

A qualified tax professional can determine the best way to finance the retirement lifestyle you want while minimizing the capital gains taxes. With help, you’ll make the most of the assets you’ve worked so hard to earn.