Capital Gains? It’s Time to Plan Your Year End Tax Strategy.

The end of this year may be the right time to take your capital gains. Real estate is turning around and the stock market has been up this year. If you have made money in either of these areas, you may have capital gains that should be addressed before the end of the year. With the change in the tax laws, taking capital gains now could save you big money later.

What are capital gains? They are any increase in captured value in personal or investment properties which are deemed by the government to be capital assets. Capital assets include such items as your home, household furnishings and stocks, bonds and rental properties. Upon the sale of a capital asset, the difference between the amount you paid for the asset and the amount you sold it for is either a capital gain or capital loss. You must report all capital gains or losses on your 1040 form and pay the capital gains tax.

Long Term or Short Term Capital Gains

Capital gains and losses are classified as long-term or short-term. This classification is determined by how long you hold the property before you sell it. If you hold your assets for more than one year, your capital gain or loss is long-term. If you hold it one year or less it is short-term gain or loss. Note you may deduct capital losses on your investment property, but not on personal property, like your home.

After you have determined your capital gains and losses, you add them together. If you have long-term gains in excess of your long-term losses, you have a net capital gain. And you will owe tax on the gains. If your capital losses exceed your capital gains, the excess can be deducted on your tax return thereby reducing other income, such as wages, up to an annual limit of between $1,500 to $3,000. If your total is more than this, you can carry over the unused part to the next year’s taxes.

I Do Not want to Pay Capital Gains Tax Now

You may be saying to yourself, “I don’t want to pay any more in tax this year than I have to,” but hear me out. Traditionally capital gains have been taxed at lower rates as a way to encourage investment, and grow the economy. Retired people and wealthy people usually make all their money in capital gains. This is why Warren Buffet paid less in tax than his secretary, percentage wise.

You have probably heard of the Fiscal Cliff and you may realize that the Bush Tax Cuts are going to expire. Currently capital gains are taxed at 15 percent for most taxpayers. However if you have a capital gain and are in the 10 percent or 15 percent tax brackets you will have a zero capital gains tax rate.

Once the Bush rates expire, the top capital gains tax rate will be 20 percent. The zero capital gains rate will return to 10 percent. Dividends will be taxed as ordinary income, meaning the top rate could be 39.6 percent. If you don’t want to take that chance, lock in your gains now at 15 percent for most investors and zero taxes for folks in the 10 and 15 percent tax brackets.

If you want to check out other tax saving ideas, see my 10 Tax Tips offering on this site.