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Capital Gains Exemption for Seniors

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Current tax law does not allow you to take a capital gains tax break based on age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales. However, this exclusion was eliminated 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 to develop a tax strategy for your financial plan.

What Are Capital Gains Taxes?

Capital gains are the profits 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 cost basis. When you sell that asset, you compare its sale price to its cost basis. If you made money, this is known as a “capital gain.” If you lost money, this is known as a “capital loss.”

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 2023, capital gains on assets that are held over one year are taxed at the following brackets:

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
0%$0 – $44,625$0  – $89,250$0 – $44,625$0 – $59,750
15%$44,626 – $492,300$89,251 – $553,850$44,625 – $276,900$59,751 – $523,050
20%$492,300+$553,850+$276,900+$523,050+

In 2024, capital gains on assets that are held over one year are taxed at the following brackets:

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
0%$0 – $47,025$0  – $94,050$0 – $47,025$0 – $63,000
15%$47,026 – $518,900$94,051 – $583,750$47,026 – $291,850$63,001 – $551,350
20%$518,900+$583,750+$291,850+$551,350+

If you sell an asset after holding it for less than a year, your capital gains will be taxed as ordinary income. For reference, the table below breaks down the income tax rates for tax year 2023:

2023 Income Tax Brackets

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
10%$0 – $11,000$0 – $22,000$0 – $11,000$0 – $15,700
12%$11,001– $44,725$22,001– $89,450$11,001– $44,725$15,701– $59,850
22%$44,726– $95,375$89,451– $190,750$44,726– $95,375$59,851– $95,350
24%$95,376– $182,100$190,751– $364,200$95,376– $182,100$95,351– $182,100
32%$182,101– $231,250$364,201– $462,500$182,101– $231,250$182,101– $231,250
35%$231,251– $578,125$462,501– $693,750$231,251– $346,875$231,251– $578,100
37%$578,125+$693,750+$346,875+$578,100+

And here’s a look at the income tax rates for tax year 2024:

2024 Income Tax Brackets

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
10%$0 – $11,600$0 – $23,200$0 – $11,600$0 – $16,550
12%$11,601 – $47,150$23,201 – $94,300$11,601 – $47,150$16,551 – $63,100
22%$47,151 – $100,525$94,301 – $201,050$47,151 – $100,525$63,101 – $100,500
24%$100,526 – $191,950$201,051 – $383,900$100,526 – $191,950$100,501 – $191,950
32%$191,951 – $243,725$383,901 – $487,450$191,951 – $243,725$191,951 – $243,700
35%$243,726 – $609,350$487,451 – $731,200$243,726 – $365,600$243,701 – $609,350
37%$609,350+$731,200+$365,600+$609,350+

Remember, the capital gains tax rate applies only to the income that’s realized when you sell an asset. If you have a mix of earned income and capital gains, 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 and Seniors

It's important to understand capital gains exemption for seniors when filing taxes.

Social Security payments and retirement account withdrawals are the two primary sources of income for many retirees. In some cases, retirees supplement this income by selling their homes to generate a significant amount of one-time income. This creates two general tax issues for seniors in the 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 offer a tax advantage up front, 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 offer tax-free growth on your contributions, which are made with after-tax dollars. 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.

Net Unrealized Appreciation

Most 401(k) withdrawals are subject to ordinary income taxes – except in the case of net unrealized appreciation (NUA). That’s the difference in value between the average cost basis of company shares you own and the actual current market value of those shares.

Normally, when you take a distribution from a 401(k) plan that includes shares of company stock, you have a few options: rolling the entire distribution over to an IRA; rolling it over to a new 401(k) plan if you’re changing employers; or moving the company stock to a taxable brokerage account and rolling the remaining account balance over to an IRA or new 401(k).

NUA can be used if you choose the third option. If you’re transferring shares of company stock to a taxable account, then NUA lets you pay ordinary income tax only on the cost basis of the stock. If you decide to sell the stock at some point, you’d benefit from paying the lower long-term capital gains tax rate, which maxes out at 20%.

Rolling shares of company stock into a new 401(k) or IRA wouldn’t allow you to get the full benefit of NUA. Instead, you’d pay ordinary income tax rates on any distributions you take, which currently have an upper limit of 37%. While separating shares of company stock from the rest of your retirement account investments adds a step to the distribution process, it can be well worth it when it’s time to pay the IRS.

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 prepare for retirement.

In 1997, Congress amended the tax code to create the standard exclusion that applies today. Under current law, individuals don’t pay capital gains taxes on the first $250,000 in profit from the sale of their primary residence, while married couples who file their taxes jointly don’t pay taxes on the first $500,000 in gains. In adding this blanket exemption, the exemption that was specifically for households 55 and older was repealed.

Bottom Line

A couple looking for capital gains exemption for seniors.

The IRS allows no specific tax exemptions for senior citizens, either when it comes to income or capital gains. The closest you can come is contributing to a Roth IRA or Roth 401(k) with after-tax dollars, allowing you to withdraw money without paying taxes. However, there are several strategies you can employ to minimize your capital gains taxes.

Tips on Tax Exemptions

  • Taxes can be tremendously complicated. A financial advisor with tax expertise can help clear up confusion and give expert guidance as you look for deductions, credits and exemptions. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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 during this year’s tax season.

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