Figuring Capital Gains Taxes

When you sell certain assets, you may incur capital gains or losses that figure highly when you prepare your income tax return. Though tax regs might change, it’s best to remember capital gains when planning your taxes and preparing now for next April’s filing.

A capital asset includes most property you own and use for personal or investment purposes. If the original purchase price of the asset plus associated expenses (the basis) is less than the proceeds you receive from the sale, you incur a capital gain. If the basis of your asset exceeds the sale’s proceeds, you incur a capital loss.

Taxes on net capital gains usually depend on your income. For lower-income individuals, the rate may be 0% on some or all net capital gains. Maximum capital gains generally kick in if your annual income tops $400,000 (individuals) or $450,000 (couples).

In 2013, the maximum net capital gain tax rate increased from 15% to 20%; a 25% or 28% rate sometimes also applied to special net capital gains. In this mid-term election year, it’s anybody’s guess how Washington will tweak capital gains taxes, if at all. Stay tuned.

For now, you can deduct capital losses from your capital gains for the year and use excess capital losses (above your capital gains for the year) to reduce your taxable income as much as $3,000 per year, carrying those losses forward for the rest of your life or until you use them up.

The Internal Revenue Service recently released Tax Tip 2014-27, which lists more facts about capital gains and losses.

1.      Capital assets include property such as your home or car and investment property such as stocks and bonds.

2.      Include all capital gains in your income. Beginning in 2013, you may also incur the Net Investment Income Tax (NIIT). This is applied at 3.8% to certain net investment income of individuals, estates and trusts that have annual taxable income above thresholds starting at $125,000.

3.      You can deduct capital losses on the sale of investment property but not losses on sale of personal-use property such as your home or car.

4.      Capital gains and losses are either long- or short-term. If you held the asset for more than one year, your gain or loss is long-term; if for one year or less, the gain or loss is short-term.

5.      If your long-term gains exceed your long-term losses, the difference is a net long-term capital gain. If this exceeds your short-term capital loss, you realize a net capital gain.

6.      If your capital losses are more than your capital gains, you can deduct the difference as a loss on your return. This loss maxes out at $3,000 per year or $1,500 if you are married and file married filing jointly.

7.      If your total net capital loss exceeds what you can deduct, you can carry that loss over to your next year’s tax return, treating those losses as if they happened in that year.

8.      File IRS Form 8949, “Sales and Other Dispositions of Capital Assets,” with your federal return to report gains and losses. You also file Schedule D, “Capital Gains and Losses.”

For more, see the Schedule D instructions and IRS Publication 550, “Investment Income and Expenses.” They’re available online or you can call the IRS at (800) 829-3676.

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Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.

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