Get Familiar With Capital Gains Tax Rates
When determining capital gains tax rates, there are several details that need to be considered. If you are unsure of how to make this determination on your own, you may want to speak with a tax professional. Not paying the proper capital gains tax can result in future problems, such as owing more money to the IRS.
Did you know that you are responsible for both federal and state capital gains tax? Many people are under the impression that they only have to pay tax to the IRS. The majority of states do not have any special rates for the later. Instead, they opt to tax capital gains at the same rate as your regular income. While this makes it easier to determine what you owe, it also means that you will have to part with more money on the state level.
In 2008, a 0% capital gains tax rate was introduced. To qualify for this special rate, you must be in the 10% or 15% tax brackets. While this rate was designed for lower-income people, there are many taxpayers who qualify. Unfortunately, this 0% tax rate is going to expire at the end of 2010. So those who are thinking about taking advantage of it should do so as soon as possible.
There are several different capital gains tax rates that you should be familiar with. They are described below:
• Short-term capital gains tax applies to assets that are purchased and sold in 1 year or less. These gains are taxed at your ordinary income tax rate.
• Long-term capital gains tax applies to assets that are held for longer than 1 year before being sold. Those who are in the 10% and 15% tax brackets must pay 5% capital gains tax ― anyone who falls outside those brackets must pay 15% capital gains tax (for most taxpayers).
• Collectibles fit into a different category (than other assets, such as stocks). Collectibles held for 1 year or less are subject to ordinary tax rates up to 35%, depending on your income level. Collectibles held for longer than 1 year are taxed at a rate of 28% on the money gained.
It is important that you understand the various capital gains tax rates so you don’t end up paying more (or less) than you are required. As you can see, holding onto assets for more than 1 year can result in big savings ― at least on the federal level.
If you are required to pay capital gains tax, for short-term or long-term assets, make sure you do so in an accurate manner.