Taxation of Capital Gains

When you sell any asset that you own for personal or investment use you end up with either a capital gain or loss. Depending on the price at which you bought the asset, you can determine whether the sale was a gain or a loss. 

Some examples of the assets include stocks, bonds, land, or pieces of art. If you make a sale of your house, it might not be made a part of capital gain/loss if you have proven it to be your primary residence for at least 2 years. 

So, why is a capital gain so important to understand? Well the most important reason being that capital gains are considered to be taxable income. Thus, understanding the effect that such income has on your tax schedule is essential.

Understanding Net Capital Gain

The rate at which the asset is taxed varies depending on how long you have had the asset for. If the asset was held for less than a year the profit derived from its sale is considered to be a short-term capital gain, one that is taxed in a similar manner to ordinary income.

 On the other hand, if you have held the asset for longer than a year, the rate at which the gain will be taxed will be different and it will be referred to as a long-term capital gain. One would question about the significance of capital losses then. 

Capital losses are generally used to offset the effect of capital gains. This means that if you have incurred a loss due to the sale of one asset you can use this capital loss to offset the capital gain that you made on the sale of another. The remaining amount that will be left is called the net capital gain. 

Tax Rate

 There is also an additional 3.8% net investment income tax that is applicable on investors that belong to a specific income group. This tax is applicable on either of the two, the net investment income or the amount by which the gross income is greater than the following:

• Married, filing jointly: $ 250,000
• Married, filling separately: $ 125,000
• Single or household head: $ 200,000

Distribution of Taxes on Capital Gains

Individuals who belong to the 10-15 percent tax bracket do not have to pay tax on most of the capital gains from long-term assets. Individuals who belong to 25 -35 percent tax bracket have to pay a 15 percent on long-term capital gains. For those who are above these tax brackets, there is a rate of 20% that is applicable. Moreover, the tax that is applicable on assets that are termed as collectibles such as, art work and antiques is higher than the rest. A 28 percent tax is applied to such items. 

How to Lower Your Burden

• If the net loss that you face in a particular year goes beyond the limit that has been set by the IRS, you have the chance to take that loss over to the next year. This means you can offset your capital gains in the next year with the help of the previous year’s losses.
• Investments that are not doing well can be sold and can be represented as a loss to adjust the net amount of the capital gains earned. For this, you can use the help of an investment advisor who can give you tips that you can use to decrease the overall tax burden.
• Avoid renting your home at all costs. Staying in the same home and considering it your primary residence is always helpful if you are trying to save money from going away in the form of taxes.
• If your home is not excluded from the net capital gains because of rental issues or the presence of a secondary home, it is useful to bring forward the receipts pertaining to the improvements and changes that you have brought about in your home. The money that you have spent on these improvements will work towards your favor in terms of lowering the amount of capital gain. 
• If the asset is given to a charity, the tax that you owe on it will be exempted.
• There are also other ways that individuals can follow in an attempt to minimize the amount of taxes. These include structured sale, charitable trust, and private annuity trust. 

Bottom Line

Reporting capital gains is the legal obligation of every citizen. A failure to do so is seen as a tax evasion and there are consequences associated with such a practice. Talk to a professional today and find out whatever you need to know about the tax liabilities that are applicable to you. You can also inquire about the different ways in which you can minimize your overall liability.