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Capital Gains Exemption for SeniorsCurrent tax law does not allow you to take a capital gains tax break based on age. Once, the IRS allowed people over the age of 55 a tax exemption for home sales. However, this exclusion was closed in 1997 in favor of the expanded exemption for all homeowners. Beyond this, only retirement accounts allow for tax breaks related to age. Consider working with a financial advisor as you do tax planning.

What Are Capital Gains Taxes?

Capital gains are the profit that you make by selling an investment asset. When you buy an investment asset, the original price that you pay for it is known as the asset’s tax basis. When you sell that asset, you compare its sale price to its tax basis. If you made money, this is known as “capital gains.” If you lost money, this is known as “capital losses.”

Unlike ordinary income, which is money that you earn through work or by selling the product of your work, capital gains are subject to their own set of taxes. (Ordinary income is taxed at income tax rates.) In 2022, capital gains are taxed at the following brackets:

  • 0%: $0 – $40,000 Single / $0 – $80,000 Married
  • 15%: $40,401 – $445,850 Single / $80,801 – $501,600 Married
  • 20%: $445,851+ Single / $501,601+ Married

So, for example, take two single individuals. One makes their entire living trading stocks and makes $40,000 per year in taxable income after deductions and exemptions. The other earns their entire living through W-2 employment. They also make $40,000 of taxable income per year.

In this case, the worker would pay up to 18.2% per dollar earned in combined payroll and income taxes. The investor would owe nothing, as payroll taxes do not apply to capital gains and their income remained inside the 0% tax bracket.

The capital gains tax rate applies only to investment-based income. If you have a mix of earned income and investment income, you must calculate each set of income based on its relevant tax bracket. If you have both capital gains and capital losses in a single tax year, you may deduct your losses from your gains when you calculate your taxes.

Capital gains taxes only apply to assets that you hold for more than a year. If you hold an asset for less than 12 months, it is taxed as ordinary income.

Capital Gains Taxes and Seniors

Capital Gains Exemption for SeniorsMost retirees make their income from two sources: Social Security payments and retirement accounts. Retirement account income is almost entirely based on capital gains, as you sell the assets from your 401(k), IRA or other portfolios. In some cases, retirees supplement this income by selling their home to generate a significant amount of one-time income. This creates two general tax issues for seniors in context of capital gains:

Retirement Accounts

The IRS encourages saving for retirement by using what is known as tax-advantaged accounts; the agency allows different tax deductions for qualifying retirement accounts.

Most retirement accounts are front-end tax advantaged, meaning that the IRS allows you to deduct money that you invest in these accounts from your income taxes during the year in which you make that investment. To put it another way, you pay no taxes on the money you invest in these accounts. The most common forms of front-end retirement accounts are 401(k)s and IRAs.

A small number of retirement accounts are back-end tax advantaged. In this case, you invest in the account with money on which you’ve already paid taxes. When you withdraw money from the account later in life, you pay no additional taxes. The most common forms of back-end retirement accounts are Roth IRAs.

Back-end retirement accounts create a form of capital gains exemption for retirees. When you withdraw money from something like a 401(k), you owe capital gains taxes on the difference between the money that you invested and the money you withdraw. (Ideally the account has grown significantly over the decades.) This is not true of a Roth IRA or similarly situated retirement accounts. When you withdraw money from those, you do not owe capital gains taxes on the profits that account has generated. You already paid your taxes up front. While this is not a specific exemption for seniors, it only applies to people who can make qualified withdrawals from retirement accounts.

All Other Circumstances

Currently there are no other age-related exemptions in the tax code.

In the late 20th Century the IRS allowed people over the age of 55 to take a special exemption on capital gains taxes when they sold a home. This let homeowners exempt up to $125,000 worth of profit from the sale of their primary residence from their capital gains taxes. The purpose was to help households either in or preparing for retirement.

In 1997, Congress amended the tax code to create the standard exclusion that applies today. Under current law, households can exempt from their capital gains taxes the first $250,000 Single/$500,000 Married of profits from the sale of a primary residence. In doing so it also repealed the existing exemption for households 55 and older.

Unfortunately for retirees, this was the only age-based exemption in the tax code. While retirement accounts have tax advantages, and you can adjust the balance of your retirement withdrawals relative to Social Security payments to minimize your applicable tax rates, there are no specific exemptions for seniors.

The Bottom Line

Capital Gains Exemption for SeniorsThe IRS allows no specific tax exemptions for senior citizens, either when it comes to income or capital gains. The closest you can come is a back-end tax advantaged retirement account like a Roth IRA which allows you to withdraw money without paying taxes. However, there are a number of strategies you can employ to minimize your capital gains taxes.

Tips on Tax Exemptions

  • Taxes can be tremendously complicated. A financial advisor can help clear up confusion and give expert guidance as you look for deductions, credits and exemptions. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use SmartAsset’s income tax calculator to get a quick estimate of how much you will owe the federal government.

Photo credit: ©iStock.com/Tinpixels, ©iStock.com/tuan_azizi, ©iStock.com/EmirMemedovski

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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