What you need to know about capital gains ... Tax Tip of the Week
.....Continuing last week's discussionLast week on the blog we discussed federal income tax brackets and their importance in tax planning. This week we will talk about capital gains.First, some definitions:
- A capital asset is defined as anything owned for investment purposes. This would include stocks, bonds, mutual funds, a second home, a business, land, art, jewelry, gold, etc.
- The definition of a qualified dividend goes beyond the scope of this article. However, they are stated on the 1099-DIV that you receive from your broker or mutual fund company.
- Long-term gains are any investment/property held for more then one year.
- Short-term gains are any investment/property held for less then one year.
- Taxable gains are determined by:Proceeds from sale – cost basis = gain/loss
For 2009, and supposedly 2010, capital gains and qualified dividends are taxed at a much lower bracket then the ordinary income brackets we looked at last week.
| Ordinary Income Tax Bracket | 10% | 15% | 25% | 28% | 33% | 35% |
| Long Term Capital Gain | 0% | 0% | 15% | 15% | 15% | 15% |
That’s right, if you are in the 10% or 15% income tax bracket, any long term capital gains or qualified dividends you have this year will have no tax liability. The tax savings are also significant for long term capital gains and qualified dividends reported by those in the higher tax brackets.Cautions:
- These reduced rates do not apply to any short term capital gains or regular dividends.
- If you are trying to maximize the amount of zero capital gain tax you must be careful not to sell off too many assets that will move you into the 25% marginal tax rate bracket.
- Collectibles (art, jewelry gold) are taxed at rates ranging from 10% - 28% depending on your tax bracket.
These reduced tax rates offer some tremendous tax reduction strategies. But act soon, we don’t think this tax break will last long.Next week, we will discuss the other taxes that make up your total tax liability for the year.Give us a cal anytime with any questions you may have.In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit www.bradstreetcpas.com....until next week.