Capital gains don’t just affect the super-rich.
In fact, if you’ve ever owned a car, stock or real estate investment (other than your home) and sold it for a profit, you’ve made a capital gain.
And if that’s the case, you’ve also been on the hook for capital gains tax—something that can add a sizable chunk to your end-of-year tax bill.
Fortunately, knowledge is power. When you know more about the capital gains tax and how it affects your unique tax situation, you can work to reduce its impact on your taxes and your wallet.
1. Not all Capital Assets Are Subject to the Capital Gains Tax
Capital assets can include anything from your car, home, jewelry and collectibles to business property and capital investment properties, such as stocks and bonds.
But not every capital gain made is subject to the same type of capital investment tax. For example, assets like business inventory and depreciable business property don’t get the capital gains treatment.
And the sale of your home—likely the biggest capital property you own—can often be excluded partially or completely from the capital gains tax, as long as:
- You owned your home for at least two years during the five-year period prior to the sale.
- Your home was your primary residence for at least two years in that same period.
- You didn’t exclude the capital gain from another home sale in the two years prior to sale.
2. Long-term Gains Face Lower Tax Rates
As many investors know, long-term capital investments—those held for more than a year—face favorable capital gains tax rates over short-term holdings.
In other words, the longer you owned a capital asset before selling, the likelier you’ll pay lower taxes on the profit.
The primary reason for this? Short-term capital investment gains are taxed at ordinary income rates, which vary according to your tax bracket and range anywhere from 10-37%. Long-term capital gains tax rates, however, are much lower (between 0-20%), amounting to a much smaller tax burden.
Depending on your income bracket, you could end up paying no investment taxes on a long-term capital gain, a stark contrast to what you’ll likely pay at the short-term rate.
It’s important to note that as long-term capital investments, collectibles like coins, stamps, precious gems and metals, fine art and antiques are taxed by the IRS at a flat 28% rate.
3. Capital Losses May Offset Your Investment Tax
Of course, not all capital assets produce a return. The good news is that any capital investment sale you take a hit on may be used to offset capital gains—helping soothe some of the sting that comes when investment taxes are due.
For example, the taxes you pay on $20,000 in long-term gains may be significantly reduced by, say, a $12,000 loss you’ve absorbed on the sale of another.
Instead of owing on the full $20,000 gain, you may now only face taxes on $8,000—a considerable drop in tax burden.
And if your capital losses exceed your gains, that difference may then be used to offset up to $3,000 in other income. If your excess losses amount to more than $3,000, the total over $3,000 can be carried forward used to offset income or capital gains in future years.
Learn more about capital gains and how they affect your taxes by calling 1-866-871-1040, or visit your local Liberty Tax® Office today.