Every year, our tax returns to the IRS include taxes incurred on all our financial gains, including incomes and sales. One of the taxes incurred is called the Capital Gains Tax which deals with profits made on the sale of certain assets.
The capital gains tax <www.thebalance.com/capital-gains-tax-guide-for-investors-357401> is a government fee on the profit made from selling certain types of assets. These include stock investments or real estate property. A capital gain is calculated as the total sale price minus the original cost of an asset.
Depending on the time span for which the assets were owned, there are two types of Capital Gains Tax-
1.Short-term capital gains tax
This is incurred when you’ve owned an asset for a year or less. Short-term capital gains are taxed as ordinary income at rates up to 37 percent; long-term gains are taxed at lower rates, up to 20 percent. Taxpayers with modified adjusted gross income above certain amounts are subject to an additional 3.8 percent net investment income tax (NIIT) on long- and short-term capital gains.
2.Long-term capital gains tax
Long-term capital gains or losses occur if you sell an asset after owning it for longer than one year.
One major exception to a reduced long-term capital gains rate applies to collectible assets, such as antiques, fine art, coins, or even valuable vintages of wine. Typically, any profits from the sale of these collectibles will be taxed at 28% regardless of how long you have held the item.
Another major exception comes from the Net Investment Income Tax <turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-form-8960-net-investment-income-tax/L15hpJmi9> (NIIT), which adds a 3.8% surtax to certain net investments of individuals, estates, and trusts above a set threshold. Typically, this surtax applies to those with high incomes who also have a significant amount of capital gains from investment, interest, and dividend income.
The main difference between the short term and long term capital gains is that short-term capital gains have a higher tax rate than long-term capital gains. This difference is essential to discourage short-term trading. Trading stocks and other assets frequently can increase market volatility and risk.
Some simple ways to decrease Capital Gains Tax are as follows-
1.Invest for the long term
Even though the instability of the stock market leaves little to personal choice, if you manage to find great companies and hold their stock for the long term, you will pay the lowest rate of capital gains tax.
2.Take advantage of tax-deferred retirement plans
When you invest your money through a retirement plan, such as a 401(k) <www.investopedia.com/articles/investing/102216/understanding-401ks-and-all-their-benefits.asp>, 403(b) <www.investopedia.com/terms/1/403bplan.asp>, or IRA <www.investopedia.com/terms/i/ira.asp>, it will grow without being subject to immediate taxes.
3.Use capital losses to offset gains
If you experience an investment loss, you can take advantage of it by decreasing the tax on your gains on other investments.While this helps decrease your capital gains tax, it also helps turn around an investment loss to one’s advantage.
Curbing one’s capital gains taxes requires more than just caution. Appropriate professional help, as provided by services like National Tax Preparers of America (NTPA), assures accuracy with our experienced tax preparers to help you save big, this tax season.
