Ask the Editor, December 5: Capital Gains and Tax Planning

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week she's looking at six questions on capital gains tax rates and end-of-year tax planning. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Capital gains and the OBBB

Question: Did the “One Big Beautiful Bill” (OBBB) make any changes to the existing federal income tax rates on capital gains?

Joy Taylor: No. Although the OBBB, which was enacted on July 4, 2025, has over 100 tax sections, there are no big changes to the taxation of capital gains. Some Republican lawmakers and free-market groups backed the idea of indexing capital gains to inflation each year, but this didn’t make it into the law. Others wanted a 15% top federal capital gains tax rate. But this proposal was also not included.

2. Tax rates on capital gains

Question: What are the federal income tax rates for capital gains for 2025 and 2026

Joy Taylor: Long-term capital gains, which are profits from the sale or exchange of capital assets held for more than a year, get favorable federal tax rates. They are generally taxed at 0%, 15% or 20%. The rates are based on set income thresholds, which are adjusted annually for inflation. Note that these same favorable rates also apply to qualified dividends. Here are the income thresholds for 2025:

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• The 0% rate applies at taxable incomes up to $48,350 for single filers, $64,750 for head-of-household filers and $96,700 for joint filers.
• The 20% rate starts at $533,401 for single filers, $556,701 for head-of-household filers and $600,051 for joint filers.
• The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Here are the income thresholds for 2026 tax returns that you would file in 2027:

• The 0% rate applies at taxable incomes up to $49,450 for single filers, $66,200 for head-of-household filers and $98,900 for joint filers.
• The 20% rate starts at $545,501 for single filers, $579,601 for head-of-household filers and $613,701 for joint filers.
• The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates, there are a couple of exceptions. Long-term capital gains from the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. Depreciation recapture from real estate sales is taxed at as much as 25%.

Short-term capital gains, which are profits from the sale or exchange of capital assets held for 12 months or less, are taxed at ordinary income rates up to 37%.

3. Stock mutual funds and capital gains distributions

Question: I invest in stock mutual funds. Every year, I pay a lot of tax on capital gains distributions from these funds at ordinary income tax rates. I’m told by my accountant that this income doesn’t qualify for the lower tax rates on long-term capital gains. Why is this the case?

Joy Taylor: As briefly mentioned in question 2, net short-term capital gains are taxed at ordinary income rates up to 37%. This applies to gains from the sale or exchange of capital assets held for a year or less, which can include capital gains distributions from stock mutual funds. Some of these funds frequently buy or sell holdings that can potentially generate big short-term capital gains distributions.

Before you invest in a stock mutual fund, check its turnover ratio. The higher the ratio, the higher the potential for tax-inefficient short-term capital gains distributions. One way around this hazard is to keep high-turnover stock mutual funds in an IRA or another tax-deferred account instead of in a taxable investment account.

4. Capital gains and state taxes

Question: Do all states tax capital gains in the same manner as the IRS?

Joy Taylor: No. Assuming your state will follow the federal tax treatment of capital gains is a mistake. Some states don’t have favorable capital gains rates, instead taxing investment income at the same rates as wages and ordinary income. A few states have preferential tax rates. And a handful don’t even tax capital gains at all. So be sure to understand your state’s tax treatment of capital gains.

5. Capital gains and the 3.8% NII tax

Question: I sold lots of investments this year for large gains. Will I have to pay the extra 3.8% surtax on top of the regular federal income taxes on my capital gains?

Joy Taylor: Maybe. The additional 3.8% net investment income tax (NII) applies to single filers with modified adjusted gross income (AGI) over $200,000 and to joint filers with modified AGI above $250,000. The modified AGI threshold is $125,000 for married people filing separate tax returns. Trusts and estates can also be hit with the NII tax if their 2025 modified AGI exceeds $15,900 and they have undistributed net income. These modified AGI amounts aren’t inflation-indexed, leading to more filers paying the NII tax each year.

The NII tax, which is added to the regular income tax, is due on the smaller of NII or the excess of modified AGI over the threshold amounts. NII includes dividends, capital gains, taxable interest, annuities, royalties, passive rents and certain income from other passive activities.

Here are a few ways to keep the NII tax at bay: Invest in municipal bonds, which generate tax-free interest income for federal tax purposes. If possible, use an installment sale to spread out a large capital gain over several years. Also, try to keep your modified AGI below the $250,000/$200,000 thresholds so that the 3.8% NII tax won’t even kick in.

6. 0% rate on long-term capital gains

Question: I know there is a 0% rate on long-term capital gains and dividends. But how does one qualify for this rate, and is there anything I should be wary of?

Answer: For 2025, if taxable income other than long-term capital gains and dividends doesn’t exceed $48,350 for single-filed returns, $64,750 on head-of-household returns or $96,700 on joint returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

These income figures are a bit higher for 2026 tax returns that you would file in 2027, since they are adjusted annually for inflation. For 2026, they are $49,450 for single filers, $66,200 for head-of-household filers and $98,900 for joint filers.

Note that although these 0%-rate capital gains might not be taxed at the federal level, they do increase your adjusted gross income. Also, capital gains may be taxed differently at the state level. For example, some states tax capital gain as ordinary income.

Here are three scenarios to help illustrate the 0%-rate rule. In all three scenarios, you have a married couple with $18,000 of qualified dividends and long-term capital gains in 2025, which are included in the taxable income amounts.

In the first scenario, the couple has $77,000 of taxable income. The full $18,000 of long-term capital gains and dividends is taxed at the 0% rate. In the second scenario, the couple has $104,000 of taxable income. $10,700 of the long-term capital gains and dividends ($96,700 - ($104,000 - $18,000)) gets the favorable 0% tax rate, and $7,300 is taxed at the 15% rate. In the third scenario, the couple has $120,000 of taxable income. The 0% rate doesn’t apply, and the full $18,000 of long-term capital gains and dividends is taxed at 15%.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

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