7 Facts About Capital Gains TaxPublished:
The more you know about capital gains tax the better off you will be. Unfortunately, there is a lot of misinformation circulating that can confuse taxpayers. It is essential that you know the facts, while disregarding all myths about capital gains tax. That way, you can play by the rules set forth by the IRS, while also doing your best to take full advantage of every tax benefit available to you. Here are 7 facts about capital gains tax:
1. Capital gains are considered either short-term or long-term. If you own an asset for 1 year or less before selling, it is called a short-term capital gain. On the other hand, long-term capital gains are those that are held for over a year before selling.
2. Short-term capital gains are taxed at the same rate as your ordinary income. This can be as high as 35% depending on your tax bracket and how much money you earn.
3. Long-term capital gains are taxed at a lower rate than short-term gains. The maximum you can pay in long-term capital gains tax is 15% (for most taxpayers). As you can see, you can save money in taxes by holding assets for more than 1 year before selling.
4. Low-income taxpayers (who fit into the 10% and 15% tax brackets) are not required to pay capital gains tax. The 0% capital gains tax was implemented in 2008, allowing many low-income taxpayers to save a lot of money.
5. Capital gains can be offset by capital losses. The IRS allows you to deduct up to $3,000 in losses per year for married taxpayers filing joint returns. That yearly limit is $1,500 for married couples who file separately. Additionally, any losses that exceed the annual limit can be transferred (or “carried over”) to the next tax year.
6. You are required to report all capital gains and deductible losses to the IRS by using Schedule D of Tax Form 1040.
7. Collectibles are not taxed the same way as other capital assets, such as stocks and bonds. Long-term gains for collectibles (i.e., collectibles held for more than a year) are taxed at a rate of 28%. Short-term collectible gains are taxed at your ordinary income tax rate, which may be as high as 35%.
These 7 facts about capital gains tax should help you better understand how the tax works, how much you have to pay (depending on how long you hold the asset), and what you can do to save some money.