Looking for a reason to start making passive income to gain more freedom? Well, check out these two charts below. They break down the 2024 capital gains tax rates based on your income and whether the gains are short-term or long-term. When it comes to short-term gains, you’ll pay the same rate as your federal marginal income tax rate. But hang on to your investments for more than a year, and the lower long-term capital gains tax rate kicks in.
President Biden is looking to increase the highest income tax rate, corporate tax rate, and potentially long-term capital gains tax rates. However, a divided Congress might make it tougher for these changes to go through. Let’s dive into the latest short-term and long-term capital gains tax rates.
For singles, the top tax-efficient passive income range is between $243,728 to $609,350. At this income level, the tax gap between short-term and long-term capital gains reaches 20%. To hit this income range, you could aim for a 4% return on investments ranging from $6,093,200 to $15,233,750.
Now, married couples also have a sweet spot for tax-efficient passive income, between $487,451 to $731,200. This range also offers a 20% tax rate difference between short-term and long-term gains. To generate this income as a couple, you’d need investments ranging from $12,186,275 to $18,280,000.
Remember that the Net Investment Income (NII) tax adds an extra layer of tax for high earners. It kicks in if your modified adjusted gross income exceeds a certain threshold. Be mindful of how NII tax can impact your capital gains tax liability.
To minimize capital gains tax, consider long-term strategies like holding onto assets long-term, utilizing tax-advantaged accounts, rebalancing with dividends, carrying losses over, and exploring tax-loss harvesting with robo-advisors. These strategies can help you optimize your tax situation while building your wealth.
Setting minimum passive income and invested capital targets can keep you motivated on your financial journey. For instance, hitting annual passive incomes of $47,025 for singles and $94,050 for married couples could be a good starting point. Adjusting your income based on cost of living and staying informed about standard deduction levels can also help you maximize tax efficiency.
In the end, finding the right balance between active and passive income, while being tax-efficient, is key to achieving financial freedom. Stay informed, adapt your strategies as tax laws evolve, and keep working towards your financial goals.
