Almost everything you own and use for personal or investment purposes is a capital asset. Your home, your furniture, stocks, or bonds held in a personal account are all examples of assets. A capital gain is the profit you made above and beyond the base price you paid for the item when you purchased it.
Once you know the dollar amount of your capital gain, you will want to know what your capital gains tax rate will be. First of all, you have to classify it as a long-term capital gain or a short-term capital gain. Short-term capital gains are profits made from the sale of an item held for less than a year. Long-term capital gains are profits made from the sale of an item held for one year or longer.
Capital Gains and Capital Losses
Capital gains and deductible capital losses are reported on Form 1040, Schedule D. At this time, net capital gains tax rates are set at 15%. The "net capital gain" is the amount of the gain that is leftover after capital losses have been subtracted. Some of these calculations pertain to short-term and long-term capital gains and losses, so be careful when calculating capital gains tax rates.
If these rates are calculated incorrectly, it's like a big red flag waving to the IRS for an audit. There are some capital gains tax rates that were lowered from 2008 through 2010, but you'll have to refer to Publication 550 from the IRS web site for specifics. This is one area of taxes that can get pretty tricky; the depth of some of this information goes beyond the scope of this article.
Three Exceptions to Lower Capital Gains Tax Rates
1. The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate
2. If coins, art, or other collectibles are sold, the net capital gains are taxed at a maximum 28% rate
3. Net capital gains from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum rate of 25%
Some taxable capital gains will require you to make estimated tax payments. See articles on tax withholding or estimated tax payments for more information.
Capital Gains Tax Rates:
* (28%)Collectibles (work of art, rug, antique, gold, silver, gems, stamps and others)
* (28%)Eligible gain on qualified small business stock minus the Section 1202 exclusion this one.
* (25%)Unrecaptured Section 1250 gain.
* (15%)"Other Gain" (not including those mentioned above) and the regular tax rate that would apply is 25% or higher .
* (0%)"Other Gain" (not including those mentioned above) and the regular tax rate that would apply is 25% or lower.
Maximum Capital Gains Rates
The Capital Gain Tax Worksheet (Schedule D) will help you figure your tax if you have net capital gain. Make sure you understand whether you should use the capital gains worksheet or the qualified dividends worksheet. Keep in mind, your capital losses can be amended on a previous tax return or put on a future tax return. There are numerical limits on claiming capital losses, so keep up to date on those figures as they change from year to year.
More Information and Guidance
If trying to keep all of this information in order makes your head swirl, help is right in front of you. Your computer is the tool you need to help you with your capital gains tax rates. I suggest using an online tax preparation software company to help you prepare your tax return accurately. A lot of audits can be triggered because of a lack of knowledge in this area of taxation. By using tax software, the taxpayer will be warned if something looks like it may trigger an audit.
Don't take a chance on sending in a tax return with errors. Calculating the correct capital gains tax rate can be complicated and confusing. Let the tax software do all of the hard work for you. Their tax experts stay up to date on the new tax laws and tax rates all year long. They know what property qualifies for what rate and whether you qualify for a lower rate or not.
