Long term capital game

[msteverlynck711]

We just sold a 2nd home that we had for over a year, then purchased a smaller 2nd home that we are renovating. Are there any changes in law regarding long term capital gain, and if not, are we able to income average for two years to pay what we owe from the profit of the sale?

[darin_w]

Hi @msteverlynck711!  The Inflation Reduction Act did not change the tax law regarding long term capital gains.  For a long term gain, the gain would be taxed at the capital gains rate, those rates for 2022 are shown below.  The income from the gain will need to be included on your 2022 taxes, there is not an option to average that over multiple years.

2022 capital gains tax rates

For taxes due in April 2023.

Tax-filing status	0% tax rate	15% tax rate	20% tax rate
Single	$0 to $41,675.	$41,676 to $459,750.	$459,751 or more.
Married, filing jointly	$0 to $83,350.	$83,351 to $517,200.	$517,201 or more.
Married, filing separately	$0 to $41,675.	$41,676 to $258,600.	$258,601 or more.
Head of household	$0 to $55,800.	$55,801 to $488,500.	$488,501 or more.

[NateTheGrEAt]

To add to the great answer that @darin_w already gave you, let me point out one other item that is commonly missed. 

To calculate which tax rate to use, note that the income amount to use is the income including the capital gain. 

For example:

Married Filing Jointly

$70,000 W2 income

$100,000 capital gain

It is very common for people to look at the table and think "oh, my income is $70,000, so I'm in the 0 percent capital gains bracket. Why am I paying tax on the gain?" This is not correct. Your income for that year is $170,000 - the total of all income including the gain in question. In that case your gain would be taxed at 15%. 

[msteverlynck711]

To make sure I understand properly, if we file married, filing jointly, and we profited $40,000, we would be taxed at 0%? Or, once added to our other taxable income, and the total would be,say, 85,000, would everything be taxed at the 15%? 

[NateTheGrEAt]

With those exact figures, a portion of the gain would be taxed at 15%. 

The actual calculation is found in the worksheet on page 36 of the Form 1040 instructions. ("Qualified Dividends and Capital Gain Tax Worksheet") 

If you want to take a look there, you can see how the tax will be calculated. And you'll probably understand why, even as a tax professional, I'm glad I have software to perform calculations like this one!