Did you make some good investments this year? Or maybe you sold some property. If you did, you’ll probably need to pay a capital gains tax.
What Are Capital Gains Taxes
No matter if you own a large portfolio or just own some mutual funds, if you make money on an investment, it’s taxable.
Capital gains taxes serve as investment income taxes assigned to certain assets on which you made money. Whether it’s stocks, bonds or property, any money you make upon their sale is taxable. The amount that is taxed depends on several factors, including:
- your filing status and income tax bracket
- length of the investment (short-term or long-term)
- your basis in the investment (generally, what you paid for it)
Capital Gains Taxes, Your Filing Status
As with many other areas of your taxes, the amount you owe is determined by your tax rate and how much income you have. Tax rates generally increase when your income increases. The more you make the higher your tax rate. Tax brackets vary based on your filing status.
Capital Gains and the Length of Your Investment
In terms of your capital gains, the IRS breaks them into two main categories: short-term and long-term.
A short-term gain is gain on the sale of assets held 1 year or less. A long-term gain is gain on the sale of assets held over one year.
Short-term capital gain is taxed at the same tax rate as your wages.
Long-term capital gains are taxed at reduced rates (generally, 0%, 15%, and 20%).
Capital Gains Tax on Investment Income
If you invested in the stock market and made money, your profit may be classified as a capital gain. This may include money made on the sale of stocks, bonds, or mutual funds.
It doesn’t matter how large your portfolio is or the amount of money you made. If you finished in the black, you generally have to pay taxes on this investment.
Again, the amount you owe is dependent on whether it was short-term or long-term gain, your filing status, and your tax bracket.
Capital Gains on Real Estate and Other Property
Selling stocks and bonds isn’t the only reason you may owe capital gains taxes. The other common way is through the sale of tangible property, most notably real estate. Like stocks and bonds, if you make a profit selling property, it may be subject to capital gains taxes.
Also like stocks and bonds, the rate you pay in capital gains taxes depends on whether it is a long-term or short-term gain.
Selling Your Home
If you sell your home for more than you paid for it, you most likely won’t have to pay any capital gains taxes.
If you're single, you can exclude up to $250,000 of gain when you file your taxes. For those married filing jointly, you can exclude up to $500,000 if both spouses lived in the house for the requisite period of time. If you don't have a period of nonqualified use, you only need to meet the following criteria:
- You've owned the home for at least 2 years out of the last 5 years.
- The home was your primary residence for at least 2 years out of the 5-year period ending on the date of the sale.
- You didn’t exclude the gain from the sale of another home within two years of the sale.
Capital Gains on Inherited Property
If you inherit property through a will or any other means and sell it, the money you make may be subject to a capital gains tax if you sell it for more than the fair market value (FMV) on the date of the decedent’s death.
Don't worry, you don't have to pay taxes on money you lost. You can actually net these losses with your capital gains. However, this doesn't apply to the sale of your home or other property held for personal use.
For example. If you made $10,000 in investments, but lost $3,000, then you'd only pay taxes on $7,000. If your capital losses are more than your capital gains, you can deduct a capital loss of up to $3,000 per year. The rest is carried forward indefinitely.
How To Report Capital Gains and Losses
For most capital gains and losses, you’ll need to fill out Form 8949 and Schedule D in addition to Form 1040. Fill out your gains and losses in their respective lines. If your gains are more than your losses, you may have to pay a capital gains tax. Again, you only owe taxes on gains after you net out your losses.
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