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Understanding the Capital Gains Tax and Money Saving Strategies

By Edited Oct 4, 2016 1 2

 If there is one thing that you cannot avoid, it is paying taxes, and the same goes for paying taxes on capital gains made in the stock market -  you must understand what the capital gains tax is! It is important to understand different tax structures to see how much you have to pay on your capital gains.

What are capital gains? According to Wikipedia, a tax on capital gains is "the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations."

What You Need to Know

These are the tax rates for 2012. President Obama signed the Bush tax cut extension for 2012. The rates always depend on your ordinary income tax bracket:

Ordinary Tax Brackets  - %10, 15, 25, 28, 33, 35.

Capital Gains Chart

Check out the chart to see where you fit.

Remember, you always pay more taxes on short term capital gains, as opposed to long term. Short term gains are sales of assets like stocks that are held less than 1 year, and long term gains more than 1 year. Capital gains is also commonly paid on the sale of real estate, such as your actual home or an investment property.

 Short Term - Same as ordinary tax bracket rate.So, 10, 15, 25, 28, 33, and 35.

Long Term - 0, 0, 15, 15, 15.

There is other important information you must know regarding the capital gains tax. According to Wikipedia, the law says you can defer the tax with tax planning strategies such as the structured sale (ensured installment sale), charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange, which is used in real estate. 

Capital Gains Chart(84848)

Also read this: "The United States is unlike other countries in that, with some exceptions, its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. U.S. citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that advertise as tax havens, U.S. law requires reporting of income from those accounts, and willful failure to do so constitutes tax evasion." Very important to know!

Do you know what a "Structured Sale" is? - "Installment sales permit sellers to defer recognition of gains on the sale of a business or real estate to the tax year in which the related sale proceeds are received. Structured sales allow the seller of an asset to pay taxes over time while having the payments guaranteed by a high credit quality alternate obligor, who accepts assignment of the buyers periodic payment obligation. Transactions can currently be done as small as $100,000." Retiring business owners and downsizing homeowners are examples of sellers who can benefit from this.

More on the 1031 tax-deferred exchange - This is very popular among real estate investors. You can make big gains on your investment property and then "trade up" for one at a higher price, without having to pay a tax on the gains you've made on your property! Normally, if you were to just sell your property, say, for a $100,000 gain, you would pay around 20 percent in taxes. Instead you can use that profit to buy a bigger property and avoid paying taxes altogether. More cash flow, less taxes!

Just remember,  the property to be exchanged must be identified within 45 days, and received within 180 days. Consult with a 1031 specialist or your accountant for more on the 1031.

Now Comes the Bad News

As you can see at the chart below, starting in 2013, tax rates are going up for capital gains. Check out the table below to see what the new rates are: 

Rates Are Going up in 2013!

This could change if a new President is in office in 2012 or if the current President decides to change it. Always consult your accountant when it comes to taxes, unless you are a professional yourself. You could limit the amount you pay in taxes if you have a good one!

Best of luck paying your taxes in 2012 and forward, I hope this guide helped you better understand the dreaded capital gains tax!



Mar 13, 2012 8:27pm
All great info on a timely subject, Thumbs up from me!
Nov 4, 2012 9:40am
Good info, this is new to me, great article
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