What is capital gains tax? – The Observer


Capital gains are the profits made on the sale of fixed assets such as stocks, bonds and property. Capital gains tax is only triggered when an asset is sold, not when the asset is owned by an investor. However, when a mutual fund sells shares of its holdings during the year, mutual fund investors could be charged with capital gains. (The distribution of capital gains from a fund is not taxable if the fund is held in a tax-deferred account.)

There are two types of capital gains: long term and short term; each is subject to different tax rates. Long-term gains are profits on assets held more than 12 months before they are sold by the investor. The American Taxpayer Relief Act of 2012 instituted a long-term capital gains tax rate for taxpayers of up to 20%. Short term gains (on assets held for 12 months or less) are taxed as ordinary income at the seller’s marginal income tax rate.

The law on tax cuts and employment, promulgated in December 2017, established “stopping points” for the application of these rates in accordance with the law in force, with the exception of stopping points. which will be adjusted for inflation.

The taxable amount of each gain is generally determined by a “cost basis” – in other words, the initial purchase price adjusted for any further improvements or investments, taxes paid on dividends, certain fees and any depreciation. actives. (If you received the property by gift or inheritance, different rules apply to determine your starting base.) In addition, any capital loss incurred in the current tax year or in previous years may be used to offset taxes on capital gains for the current year. Losses of up to $ 3,000 per year can be claimed as a tax deduction for married spousal filers and $ 1,500 for separately married filers.

If you have been buying shares of a mutual fund for several years and want to sell some holdings, ask your financial professional to sell the shares you bought for the larger amount as this will reduce your earnings. in capital. Also, be sure to specify which stocks you are selling so that you can take advantage of the lower rate on long-term gains. Otherwise, the IRS may assume that you are selling stocks that you have held for a shorter period of time and tax you using short-term rates.

Capital gains distributions for the previous year are reported to you on or before January 31, and any tax owing on the gains must be paid on or before your tax return due date.

High income taxpayers should be aware that they may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains) if their gross income adjusted exceeds $ 200,000 (single filers) or $ 250,000 (married spouses). This is a result of the Patient Protection and Affordable Care Act.

Provided by Shane J. Duhe, a financial representative at Duhe Financial Strategies, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual)

© 2021 Massachusetts Mutual Life Insurance Co, Springfield, MA 01111-0001 CRN202204-262185

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