About Capital Gains Tax
Capital gains taxes are an issue for many investors who "play" the stock market or "flip" real estate, as they are a special tax available for those who realize a profit on these kinds of assets if they are held for longer than a year. Furthermore, capital gains tax exemptions are a key issue for anyone who realizes a profit on the equity in selling their home. Combined, these considerations make this tax an issue even middle class Americans should be aware of.
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Identification
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A capital gain is the profit made from the sale of a capital asset, like a bond, stock or property. This implies that the capital asset was sold for more than it was purchased for. Therefore, a capital gains tax is the tax placed on this form of profit, and is usually separate from income taxation. Note that the profit from selling a bond (on the bond market) is a capital gain, while merely receiving the proceeds of the bond when it reaches maturity is usually not considered to be. The particulars of what constitutes a capital gain can vary widely given what the law is.
Features
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In the United States, some forms of capital gains receive preferential treatment under the tax code. Short-term capital gains, defined as profit from assets held for less than a year, are subject to standard income taxation. Long-term capital gains, or profits from assets held for more than a year, are taxed under a special rate. This rate is currently 15 percent, or 5 percent for individuals in the lowest two income brackets.
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Time Frame
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The tax law prior to 2003 was 20 percent on capital gains, and 10 percent for taxpayers in the 15 percent bracket or lower. The long-term rate was 18 percent for assets held longer than 5 years, and 8 percent for taxpayers in the 15 percent bracket or lower. The current reduced and revised rate will last until 2011, and unless it is amended or extended by Congress, will expire at that time.
Considerations
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The U.S. Capital Gains Tax is rare in that it is applied to the capital gains of United States citizens wherever those gains come from or wherever they reside. While there are exemptions and special conditions, all citizens are required to at least report on foreign capital gains. Also, if an individual or corporation has both capital gains and losses in the same year, the losses subtract directly from the gains, and if the result is a negative, it can be applied as up to a $3,000 deduction. There are also legal strategies for deferring the payment of capital gains taxes.
Expert Insight
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The area where capital gains is an issue for most middle class Americans is in the sale of real estate or stocks, with stocks being a relatively minor issue. Federal law allows for property owners to exclude a certain amount of capital gains ($250,000 for singles, $500,000 for married couples) from the sale of their real estate if it was used as a primary residence for at least 2 of the 5 years before the sale.
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