How to Estimate Capital Gains Tax

When you sell a capital asset, whether it relates to your business or personal life, you are going to get nicked with capital gains taxes. While capital gains taxes are less than normal income taxes, it is a good idea to estimate capital gains before tax season comes around so you won't be caught off guard when it comes time to pay.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• Original purchase price of capital asset
• Sales price of capital asset

1. Gather information such as original purchase price, sales price, your income tax bracket and the length of time you have held the asset.
2. Calculate the net taxable dollar amount. Do this by subtracting the sale price from the purchase price. For example, if you purchased a house for 130 thousand and sold it for 175 thousand, your net taxable dollar amount is 45 thousand.
3. Understand how the length of time you have held the asset matters. If you have held your capital asset for one or more years, you will be taxed at the federal capital gains tax rate of 15 percent. When you have held onto an asset for one year or less, you are taxed at your normal income tax rate.
4. Estimate the capital gains tax. Take the taxable dollar amount and multiply it by your income tax rate if you have held the asset for less than a year and the federal capital gains tax rate if you have held it for over a year. The result is your estimated tax.

Tips & Warnings

• Remember, these are just estimations. When other income information is factored in when you are completing your federal income tax return, the amount of capital gains taxes you will pay could be higher or lower than the estimated amount.
• Put a little bit of money away every month so you don't find yourself short when it is time to pay your taxes.
• Don't lie on your taxes. This means no "fudging" numbers or lying about how long you have held onto an asset. It is illegal.