US Capital Gains Tax
For US Persons/Taxpayers:
Almost everything you own and use for personal or investment purposes is a capital asset. Examples of capital assets include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Generally, an asset’s basis is its cost to the owner. You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis.
To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term “net long-term capital gain” means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. The term “net short-term capital loss” means the excess of short-term capital losses (including any unused short-term capital losses carried over from previous years) over short-term capital gains for the year.
For Non-Resident Aliens:
Aside from in relation to real estate, non-resident aliens are not liable to US Capital Gains Tax
CGT Rates
For taxable years beginning in 2023, the tax rate on most net capital gain is no higher than 15% for most individuals.
A capital gains rate of 0% applies if your taxable income is less than or equal to:
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$44,625 for single and married filing separately;
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$89,250 for married filing jointly and qualifying surviving spouse; and
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$59,750 for head of household.
A capital gains rate of 15% applies if your taxable income is:
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more than $44,625 but less than or equal to $492,300 for single;
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more than $44,625 but less than or equal to $276,900 for married filing separately;
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more than $89,250 but less than or equal to $553,850 for married filing jointly and qualifying surviving spouse; and
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more than $59,750 but less than or equal to $523,050 for head of household.
However, a capital gains rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.
Gift Tax Exclusion
ANNUAL GIFT TAX EXCLUSION
Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2024, $18,000) per recipient tax-free without using up any of the taxpayer’s lifetime gift and estate tax exemption (in 2024, $13.61 million).
Not only are the assets removed from the taxpayers’ taxable estates, the assets’ future appreciation also avoids gift and estate taxes.
GIFTS TO NON-US CITIZEN SPOUSE
Generally, spouses who are both US citizens may transfer unlimited amounts to each other without incurring any gift tax, as any assets in excess of the couple’s combined estate tax exemption will be taxed at the death of the surviving spouse, and transferring assets to the survivor only defers the tax that the IRS will eventually collect.
Gifts to a non-US citizen spouse, however, are limited. When the recipient spouse is not a US citizen, and regardless of whether the non-US citizen spouse is a resident or nonresident of the United States, the amount of tax-free gifts is limited to an annual exclusion amount.
For calendar year 2024, the first $185,000 of gifts to a spouse who is a non-US citizen are not included in the total amount of taxable gifts.
LIFETIME ESTATE AND GIFT TAX EXEMPTION
If an individual gifts an amount that is above the annual gift tax exclusion, a portion of the individual’s lifetime gift tax exemption ($13.61 million in 2024) will be used. The gift and estate tax exemption are linked, meaning that the use of one’s gift tax exemption will reduce the amount one may leave at death estate-tax-free.
If an individual makes gifts in excess of the annual gift tax exclusion, a gift tax return will be due on April 15 the following year to report the gift (and track the amount of the lifetime exemption that has been used).
The Opportunity
If you are the US Citizen in a mixed marriage (one with a non-US Citizen spouse), you may have the opportunity to pass appreciated assets to your spouse before they are sold. In doing this, you can convert gains which would be taxable in your hands to gains which are non-taxable in theirs.
For example, if we assume that you hold $1m of US stock and ETFs in a brokerage account, and have contributed $700k to that account over the last 10 years. The gains within that account clearly amount to $300k (for simplicity, I am puting aside the fact that some of the account value increase would be from dividend income). Over the course of six years you could transfer that stock to your spouse, and that spouse could then sell when desired without any tax being due. That would likely save in the region of $60,000 in tax, based on an assumed CGT rate of 20%.
It should be noted that the annual gift allowance does not roll-over if unusued, and so it is important to avoid delay in this planning process and get started as soon as possible.
Conclusion
Don’t let the complexities of financial planning hold you back. Take the first step towards a more secure and prosperous future. Reach out to Chartwell Associates today, and let’s make this year the beginning of your best financial journey yet. Your goals, our expertise – together, we can achieve remarkable financial milestones.
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