Leonardo DiCaprio in “The Great Gatsby,” the 2018 movie version of F. Scott Fitzgerald’s novel. (Warner Brothers Pictures promotional photo)
Letting your money work for you via investments gets a boost next year, with wider capital gains tax brackets. Also affected by the annual inflation bumps are estate planning, gifts you give before you go, and youngsters’ investment earnings.
Taxes were not part of the inspiration for F. Scott Fitzgerald’s oft-quoted observation that the very rich “are different from you and me” in his 1925 short story “The Rich Boy” (not “The Great Gatsby”).
But writer’s assessment definitely applies to the wealthy and how the Internal Revenue Code works in many cases to their advantage.
Most of us middle-income taxpayers get our money working for wages. Wealthier individuals, however, tend to let their money work for them as investments. And when they cash out long-term assets, the tax rate on those profits is typically much lower than the ordinary income tax rates that apply to wage and salary income.
A holding is long-term for tax purposes when it is owned for more than a year. At that point, it qualifies for the long-term capital gains tax rate. And the maximum capital gains rate for those in the top 37 percent tax bracket is a substantially lower tax rate of 20 percent. The top capital gains tax rate for less wealthy sellers of long-term assets is 15 percent. And some individuals can sell their long-term assets and owe no — that’s right, zero — capital gains tax.
Capital gains and other wealth-related tax matters: While the three most-common lower capital gains tax rates can make a big difference for the ultra-rich, the lower tax rates apply to taxpayers across the full income spectrum who own and sell appreciated assets.
The lower capital gains tax rates also share one thing with ordinary tax rates. The tax brackets to which these three capital gains tax rates apply also are indexed each year for inflation.
This post, Part 5 of the ol’ blog’s annual 10-part tax inflation series, examines those capital gains tax bracket changes.
It also will look at other tax matters that generally apply to wealthier taxpayers who have more discretionary income. That includes how much of wealth they can pass along to heirs without triggering the federal estate tax, as well as the amount in gifts they can hand out tax-free while they’re still around to get the thanks. And youngsters getting an early investment start can shield more of those dollars from federal taxation. But since making the money that we hope will one day grant us entry into the different world of the wealthy is the first step, and since time is money, let’s get started with the 2026 inflation adjustments for capital gains.
Inflation-indexed capital gains tax rates: As noted earlier, since richer people have more discretionary income, they tend to invest substantial chunks of that money. These amounts, which provide a nice income stream when investments are large, are known as unearned income.
The regular payouts of capital gains distributions and qualified dividends generally are taxed at the lower capital gains tax rates. When the income producing investments eventually are sold after being held for more than a year, any profit is taxed at the applicable lower capital gains tax rate. The rate depends on your overall income and filing status. The table below shows the inflation adjustments for the 2026 long-term capital gains tax rates.
| 2026 Tax Year | Capital Gains Taxable Income Brackets by Filing Status | |||
| Long-Term Capital Gains Tax Rate | Single | Head of Household | Married Filing Jointly or Surviving Spouse | Married Filing Separately |
| 0% | $0 to $49,450 | $0 to $66,200 | $0 to $98,900 | $0 to $49,450 |
| 15% | $49,451 to $545,500 | $66,201 to $579,600 | $98,901 to $613,700 | $49,451 to $306,850 |
| 20% | $545,501 and more | $579,601 and more | $613,701 and more | $306,851 and more |
For comparison, and to use in figuring your 2025 taxes when you file next year, here are this year’s long-term capital gains rates and income brackets:
| 2025 Tax Year | Capital Gains Taxable Income Brackets by Filing Status | |||
| Long-Term Capital Gains Tax Rate | Single | Head of Household | Married Filing Jointly or Surviving Spouse | Married Filing Separately |
| 0% | $0 to $48,350 | $0 to $64,750 | $0 to $96,700 | $0 to $48,350 |
| 15% | $48,351 to $533,400 | $64,751 to $566,700 | $96,701 to $600,050 | $48,351 to $300,000 |
| 20% | $533,401 and more | $566,701 and more | $600,051 and more | $300,001 and more |
Again, the key to the better tax treatment is holding on to the asset long enough for it to qualify for the more tax favorable long-term capital gains rate. Otherwise, you’ll owe at the short-term capital gains tax rate, which is your usually higher ordinary income tax rate.
So, patience in investing, when possible, can make a big tax difference.
Note, too, that in addition to capital gains tax rates listed in the tables above, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax. And yes, there are other capital gains tax rates for other holdings, like collectibles (e.g., coins, sports cards, etc.), but they aren’t affected by inflation.
Capital gains tax on estates: Uncle Sam also collects capital gains taxes on estates and trusts.
For 2026, the maximum zero capital gains tax rate applies to estates or trusts worth up to $3,300. The top earnings level for an estate or trust to be taxed at 15 percent is $16,250. The 20 percent rate applies to these entities worth $16,251 or more.
For comparison, in 2025 the maximum zero capital gains tax rate applies to estates or trusts worth up to $3,250. The top earnings level for an estate or trust to be taxed at 15 percent is $15,900. The 20 percent rate applies to these entities worth $15,901 or more.
Estate and trust tax rates: There’s also a tax, with its own rate schedule, on earnings from trusts and estates. This applies to income that trustees choose to retain rather than distribute to beneficiaries.
Under this system, higher rates kick in at lower income levels than the tax rates and income brackets for individual taxpayers. The design was intentional to keep trusts from being used as tax shelters.
The estate and trust tax rates for 2025 and 2026 are shown in the table below.
| Trusts and Estates Tax Rates and Income Brackets | ||
| Rates | 2025 | 2026 |
| 10% | $0 to $3,150 | $0 to $3,300 |
| 24% | $3,151 to $11,450 | $3,301 to $11,700 |
| 35% | $11,451 to $15,650 | $11,701 to $16,000 |
| 37% | $15,651 and more | $16,001 and more |
Estate tax exemption increase: Your investments over the years have done well, allowing you to provide in the manner you wish for your family here and now. You’ve also accumulated enough to be able to leave a generous amount to your heirs.
The good news for most of us is that we won’t have to worry about the federal estate tax. A portion of what you leave is free from taxation by Uncle Sam, and that generally covers most U.S taxpayers.
The One Big Beautiful Bill Act (OBBBA) that became law on July 4 made permanent the Tax Cuts and Jobs Act (TCJA) of 2017’s favorable tax treatment of estates. A key OBBBA change is an increase in the size of an estate that is exempt from the federal estate tax, effective was increased.
Beginning in 2026, the gift, estate, and generation-skipping exemption amount will be $15 million. That’s $15 million per person, so a married couple can pass $30 million tax-free beginning in 2026 to heirs. The amount will continue to be indexed for inflation.
The 2025 estate exemption for someone who dies this year is $13.99 million per person. Again, the per person application means a married couple can protect $27.98 million from estate taxation this year.
When an estate exceeds those tax-year amounts, then and only then is the federal estate tax, which can go as high as 40 percent, assessed on the overage.
Obviously, these ever-increasing multimillion-dollar exclusion amounts mean that the hubby and I — and our families and our friends — likely will never have to worry about the federal estate tax … unless we win the lottery!
Note, though, that you might have to worry about the state tax collector. A dozen states and the District of Columbia still have either an estate or inheritance tax — our old Maryland stomping grounds has both — and their exclusion levels are much, much lower than the federal level.
Tax-free gifting, too: Sometimes people want to share their wealth while they are still around to get the thanks for their generosity.
Not only is that a heartwarming move, it could be tax smart. Giving away some of your assets could help keep your eventual estate out of Uncle Sam’s hands when death and taxes finally converge.
The tax code allows you to give a specific amount, known as an annual exclusion, in gifts to others. This will help reduce your estate’s value and there’s no tax ramifications for the gift recipients.
But since the gift and estate tax exemptions are linked, if you make any gifts in excess of the annual gift tax exclusion, these lifetime gifts will reduce the amount of your estate that is tax-free when you pass.
For 2026, that exclusion amount is $19,000 per person. That’s the same as the 2025 amount. For individuals who have spouses who are not U.S. citizens, the exclusion is increased to $194,000 next year from the 2025 limit of $190,000.
Like the estate tax exemption, the gift exclusion limits each year are per person. That means if you’re married, you and your spouse each can give a combined $38,000 to the same person in 2025 and 2026.
Pulling out my handy calculator, that also means that a married couple with three kids and five grandchildren can each give those eight family members a combined gift total of $304,000 in 2025 and 2026.
And despite my example, you (and your spouse) also can give these gifts to folks beyond your family. That’s right. There’s no familial relationship requirement. So, if you have some spare cash and really enjoy the ol’ blog, just let me know.
Also, the gifts are not limited to dollars. You can give assets valued up to the limit, such as gifts of real property and family heirlooms.
By bestowing your cash and property beforehand, you can reduce the amount of your assets left to be distributed after you’re gone. This is a good way to dole out your estate the way you want and keep its value under the amount that will trigger the federal estate tax.
Even better, as long as you follow the rules, you won’t face any gift tax.
Best of all, for those on your list, your gifts are not taxable to the recipients.
Adding up all those gifts: The major tax-related gifting rule is, of course, that you can’t just give away all your riches to escape the tax collector. That’s why the lifetime gift exemption, aka the unified credit against the estate tax, was created.
As the name indicates, the lifetime gift exemption is the total amount of gifts that can be given away tax-free by a person over his or her lifetime to any number of people.
It’s easy to keep track of because it’s the same as the annual estate tax exemption amount. Again, in 2025 that’s $13.99 million (or $27.98 million per married couple). For 2026, it’s the new OBBBA $15 million per person (or $30 million per married couple).
If you do go over the lifetime gift exclusion, you will owe a 40 percent tax on those excessive gifts.
Counting the kiddie tax: One of the best gifts parents can give their children is financial education. In many cases, this includes investment accounts in the youngsters’ names so they can see first-hand how the system works, or sometimes doesn’t. Yeah, learning about money can be painful and literally costly.
Often the accounts are opened with monetary gifts, which as noted in the earlier $19,000 per person gift exemption amount discussion, can be useful tax planning for the givers.
Investments and their earnings have some additional tax considerations for young market mavens. When young people — up to age 23 if a full-time student or 18 if not going to college — have unearned income, generally from dividends and interest or distributed capital gains, that exceed certain limits, the kiddie tax comes into play.
The kiddie tax first appeared in 1986 as a legislative way to close a tax loophole for the wealthy. After a certain earnings level, a child’s investment income was taxed at the same rate as that of their parents. By effectively raising the potential tax on the youngsters’ passive income, the idea was that well-to-do adults wouldn’t be so inclined to shift their wealth by putting it in their lower-taxed children’s names.
So, what’s the earnings amount today that triggers the kiddie tax?
For 2025 and 2026, a young investor’s first $1,350 of unearned income is not taxable. Then the next $1,350 in unearned income for both tax years is taxed at the child’s tax rate, typically the lowest 10 percent rate.
Only when a child’s investment earnings top the combined limit — $2,700 in 2025 and 2026 (the untaxed $1,350 and the next $1,350 taxed at the child’s rate) — is the young financier’s excess unearned income is taxed at higher rates that typically apply to their parents’ taxes. Parents can opt to include a child’s gross income in the adults’ gross income and calculate the kiddie tax there. One of the requirements for this parental election is that a child’s gross income, in both 2025 and 2026, must be more than $1,350 but less than $13,500.
Nanny tax changes, too: Speaking of youngsters, wealthier families often hire full-time nannies to help out with childcare. Their salaries also could trigger coverage under the Social Security program.
Although it’s popularly known as the nanny tax, the income that prompts these tax payments isn’t limited to salaries for modern-day Mary Poppins. It could go to any person, known officially as a domestic employee, hired to help with the upkeep and running of the employer’s home.
When one of these household workers earns more than a certain amount, that employer must pay their portion of the worker’s Federal Insurance Contributions Act, or FICA, taxes that go toward the federal Social Security and Medicare programs. Remember, FICA taxes require employees and their bosses to equally split payment of these taxes.
The Social Security Administration (SSA) issues cost-of-living (COLA) adjustments to the domestic help salary that triggers FICA coverage each year. For 2026, the income threshold for domestic workers will increase to $3,000. That’s a bump up from the 2025 household worker income trigger of $2,800.
Yeah, I know. Dealing with household staff taxes and the tax bite on money mostly from investments and how much to leave heirs tend to be rich people’s worries. It also seems to be a particular problem of high-level government appointees.
Most of the ol’ blog’s readers (including me!) won’t have to mess with those tax hassles. But some middle-income taxpayers do hire household help. And we all can hope that a windfall might eventually come our way. When any of that happens, we need to pay attention to the tax ramifications, including how inflation affects them.
More inflation tax info on the way: Good news. This Part 5 look at taxes that generally affect wealthy taxpayers means we’re half-way through this year’s annual 10-part 2026 tax inflation series.
I know I’ve been a bit slow in posting the 2026 amounts. Mea culpa and a brief explanation, not an excuse. Some personal issues that required immediate attention converged with efforts to get the ol’ Don’t Mess With Taxes blog back online (it’s now here!) and new hardware that took some time to get in the shape I want.
Here’s a table of contents preview of what’s ahead in the 2026 version of tax-related inflation changes. It also is a good indicator of why I do it as a series.
- 2026 tax rates and income brackets
- Standard deduction amounts and itemized deduction considerations
- Credits and deductions, including adoption costs and assistance, Lifetime Learning Credit, Earned Income Tax Credit, educators’ expenses, interest on education loans and transportation fringe benefits
- Medical-related tax provisions, including contributions to a flexible spending account (FSA), health savings account (HSA), medical savings account (MSA), and eligible and eligible long-term care premiums
- Capital gains tax income brackets, estate and gift tax limits, kiddie tax, kiddie tax, and nanny tax
- Alternative Minimum Tax exemption amounts and One Big Beautiful Bill Act changes for 2026, along with the Social Security wage base increase amount and other pay-related taxes
- International worker tax issues, including foreign income and housing exclusions
- Retirement (e.g., IRA etc.) and pension plan contribution limits
- Penalties, for both individuals and tax pros, for things such as failure to file a timely 1040 or certain information returns
- Standard mileage deduction rates (This is the final component, since the IRS issues these adjustments and later in the year.)
Again, I know all y’all tax geeks want as much tax information as soon as possible. I get it. So, I really appreciate your patience when comes to my extended presentation of the 2026 tax inflation info.
This post also appeared on my Don’t Mess With Taxes Substack.
