By James O'Brien.
If you're prepared to pay higher taxes because of your income bracket -- especially if you're drawing on dividends, long-term investments, or sales of assets in the process -- then 2014 is a year to give special attention to the capital gains tax landscape.
This tax season, there's a fresh bump to net investment in play. Why is it there? The reason is tied to the Affordable Care Act, which created several new instruments -- ostensibly Medicare taxes (though in neither case does the tax revenue that they generate fuel health care directly). But regardless of the political underpinnings of the change, if you've made a profit from long-term holdings in the past tax year -- the result of some skilled portfolio management or otherwise -- devote some time to the following points.
Whether long-standing or recently introduced, you'll want the rules and thresholds in mind so that you can prepare for the federal tax implications.
Short-term capital gains are taxed as ordinary income, and when it comes to long-term investments, taxpayers in the lowest two brackets get to pay zero capital gains.
But once you're dealing with higher brackets, things start to shift. From the basics to recent additions, the following list will help paint the picture when it comes to capital gains rates in 2014.
The surtax factor: new charges on net investment income
So, that's the bracket-related rate structure, but beyond the capital gains increase to 20%, what's in play additionally are the ways that the federal government's new surtax affects taxable dollars. The details are as follows.
Attendant to all this, remember that capital gains can often be balanced by capital losses.
For example, if your portfolio is chock-full of $70 stocks and it took a hit that plunged those shares to a selling price of $60 per and you sell, then in your filing for that tax year, you can claim a $10 loss per share.
Another approach to balance capital gains with capital losses is to factor in depreciation of assets. Here, it gets nuanced pretty quickly, but a big-picture example would be that a small-business owner who has purchased, say, a garage where he conducts auto repairs, can take deductions over time. The amount of the deductions -- the capital losses -- are calculated against what the owner paid for the building itself (minus surrounding land, etc.).
Finally, you'll also want to know your state's capital gains tax parameters. Start with the website of the department of taxation (or its equivalent) where you live -- mining down to the capital gains rates and thresholds typically listed at those sites. From there, you can construct the whole picture when it comes to federal and state capital gains when you file this spring.
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