Taxpayers are usually terrified of the word “capital gains.” You can define capital gains as the profits you gain from the sale of an asset. As per capital gains tax law, you have to pay taxes on the profits you make when you sell an asset. You can make a capital gain on assets such as land, stocks, or bonds. On the other hand, if you made a loss on a piece of property, it is considered to be a capital loss for which you get a tax deduction.

A clause in the capital gains tax law permits you to avoid paying capital gains tax even if you make a huge profit while selling an asset. Real estate in one area in which you can dodge capital gains tax. Real estate is known to be a very profitable venture; its price never goes down as long as you own it. The good news is that IRS has enabled tax payers, who invest in real estate, to avoid paying taxes on the profits they make on it.

As per capital gains tax law, if you are single and make a profit of less than $250,000 or if you are married and make a profit of less than $500,000 on the sale of your primary residence, you don’t have to pay any capital gains tax. So, unless you make a really big profit while selling your residence, capital gains tax is not something you have to worry about. Even if you make a profit exceeding $250,000 or $500,000, you have to pay taxes only on the amount which exceeds that.

If you would like to sell a house that you have been renting, you will be interested to know that you can consider it to be your primary residence, provided you live in it at least two years during a span of five years before you sell it. Several people who invest in real estate use this convenient clause to escape capital gains tax. All they have to do is to live in the property they have been renting for two years just before selling it.

Capital gains tax law has yet another clause that can help you avoid paying taxes on profits made on a place you have been renting even if you don’t live in it for two years. You simply have to invest your profits in more real estate property, and you can escape paying capital gains taxes.

You have to pay taxes on profits made out of selling bonds. If you have held the stock for five or more years, you have to pay a 15 percent capital gains tax . However, if you have held it for less than five years, you have to pay almost double, that is 30 percent.

Your tax professional is the best person to answer any queries you might have on capital gains tax law.

Related posts:

1. Things to Know about gold Bullion In these recent days, many people getting more aware on...

Related posts brought to you by Yet Another Related Posts Plugin.

The capital gains rate for certain taxpayers will drop to 0% for tax years 2008 through 2010. How can you take advantage of this 0% capital gains rate?

First, let’s review the capital gains rate in general.

Gains from sales of personal investments held for more than 12 months generally are taxed at the capital gains rate which is 5% or 15%. The 5% capital gains rate is available only to those whose ordinary income is taxed at 15% or less. The 15% capital gains rate will remain effective through 12/31/10 (barring any changes to the law prior to that time). The 5% capital gains rate will continue through 12/31/07; then the rate drops to 0% for tax years 2008 through 2010.

The 15% income tax brackets will be higher in 2008 as the IRS makes its annual adjustment for inflation, which will be announced later this year. However, to get an idea of who may qualify for the 15% and under brackets, currently in 2007 a married couple filing jointly must have taxable income (which remember is all of the taxpayer’s income less their itemized deductions) of no more than $61,300; and for a taxpayer with a filing status as single, the cutoff is $30,650.

Next, let’s review what is a capital gain.

The reduced rates for long-term capital gains generally apply to the “adjusted net capital gains”, which include net long-term capital gains (the excess of long-term capital gains over long-term capital losses) less any net short-term capital loss (the excess of short-term capital losses over short-term capital gains). This excludes sales of collectibles (such as art work), qualified small business stock (also known as section 1202 stock), and unrecaptured 1250 gains (which result from the sale of depreciable real property). These gains also include qualified dividend income (”QDI”), dividends from domestic corporations that qualify for the 15% tax rate. For most taxpayers the adjusted net capital gains is merely the sum of net long-term capital gains from real estate, stocks, bonds, and mutual funds, plus any QDI.

Now, let’s review how to determine which capital gains rate is used.

In order to find out which capital gains rate (5% or 15%) a taxpayer’s gains are subject to, begin with taxable income and then subtract the capital gains received during the tax year. Subtract the difference from the maximum tax bracket amount (e.g., $61,300 or $30,650). The result is the amount of capital gains subject to the 5% rate (or 0% rate in 2008), with the remainder subject to the 15% rate.

Of course, if taxable income without capital gains is greater then the taxpayer’s 15% ordinary tax bracket, then all of the capital gains are taxed at the 15% rate. Conversely, if taxable income including capital gains is less than or equal to the taxpayer’s 15% ordinary tax bracket, then all of the capital gains are taxed at the 5% (or 0% in 2008) rate.

Let’s take a look at a few examples of how the calculations work.

1. Suppose a taxpayer filing under the “married filing jointly” status has total ordinary income of $36,100 included in taxable income plus adjusted net capital gain income (ANCGI) of $25,000 for a total taxable income of $61,100. Since taxable income is less than the cutoff of $61,300 (see above), all of the ANCGI is taxed at the 5% rate for 2007, and would be taxed at 0% if they had this income in 2008, 2009 or 2010.

2. Suppose, instead, that the taxpayer filing under the ” married filing jointly ” status has total ordinary income of $65,000, and ANCGI of $35,000, for a total taxable income of $100,000. Since the ordinary portion of the taxable income is greater than the cutoff for the lower tax bracket, all of the ANCGI is taxed at the 15% rate.

3. Finally, let’s say the taxpayer filing under the “married filing jointly” status has ordinary income of $43,100, and ANCGI of $60,000, for total taxable income of $103,100. Since ordinary income is less than the maximum taxed in the 15% regular tax bracket, part of the capital gains will be taxed at 5% (0% for 2008). The amount taxed in the lower bracket is $18,200 ($61,300 – 43,100). The remaining capital gains of $41,800 [$60,000 - 18,200] are taxed at the 15% rate.

Let’s go over the cautions to consider in your planning.

Caution #1: The kiddie tax

When Congress first passed the bill to lower the capital gains rates, there was a huge loophole. Taxpayers could gift appreciated stocks and mutual funds to their teenage children, who are usually in a low tax bracket. Then the teenagers could sell the investments at the 0% rate in 2008 and pay no tax on the gains. Lawmakers took exception to this planning, noting that the intent of the bill was to allow retirees to pay a lower rate on investments they may need to cash out.

In response, Congress broadened the “kiddie tax”, which kicks in when a child’s investment income (such as interest and capital gains) exceeds a certain level. This investment income is then taxed at the parents’ top marginal rate. Currently, that level is at $1,700, so any investment income received by children in excess of $1,700 is taxed at their parents’ tax rate. In the past, the kiddie tax applied to children under the age of 14. It has now been raised to include those younger than 19 and up to 24 years old if the child is a full-time student.

Caution #2: AMT

Regardless of the potential benefits possible from the favorable capital gains rates, be aware that the Alternative Minimum Tax (AMT) may eliminate any potential benefit. As a taxpayer “cashes” out investments to take advantage of the favorable rates, the additional income, even if qualifying for lower tax rates, could push the taxpayer’s overall income into a higher bracket, which could trigger the AMT and effectively negate the benefits of the lower capital gains rates. Seem complicated? It is. We strongly recommend you review all AMT and capital gains issues with your CPA/Tax Coach.

What are the planning opportunities? Who stands to benefit the most from the reduced capital gains tax rate?

Adults who provide financial support to their aging or retiring low-income parents. Gifting appreciated capital assets such as stocks or bonds instead of cash, can be a good way to provide them with extra income. Taxpayers can gift up to $12,000 a year per person with no gift-tax consequences. If married, a taxpayer and spouse may give up to $24,000.

Retirees with investment accounts. The capital gains breaks do not affect the withdrawals from tax-deferred retirement savings plans (i.e., IRA’s). But if the taxpayer is retired (retiring) and owns stocks, bonds, or mutual funds, the 2008 tax year may be the time to sell.

Related posts:

1. Things to Know about gold Bullion In these recent days, many people getting more aware on...

Related posts brought to you by Yet Another Related Posts Plugin.

Hey all you smart mutual fund investors, listen up!  Check your accounts on line now, or call your broker or investment company,to see if your fund issued any capital gains this month.  That’s right, even though your fund’s value probably took a nose dive, there very well may have been trading in that fund throughout the year that could have resulted in a capital gain.  Mutual funds distribute the bulk of such gains during December to their shareholders, so you COULD owe income tax on capital gains even though your fund is sporting a big fat loss, or even a mild-paunchy loss…

You see, when a lot of novice or nervous investors call 1-800-REDEEM (that’s a joke, not a real number to my knowledge) fund managers have to raise enough capital by 4pm EST each day of trading to satisfy all the redemptions.  Well, quite a few savers sold out of mutual funds when the markets started declining.  (Generally it’s savers, not investors, that panic and sell prematurely incidentally.)  So, quite a few mutual fund managers had to juggle their portfolios, invariably selling out securities that had built-in capital gains.  Yes, I know, a distant memory…over 6 months ago, even…but I digress.

If the mutual fund manager wasn’t able (or interested) to offset those gains with losses, there may have been an excess of gains over losses, resulting in us shareholders having to declare a portion of those gains on our individual income tax returns.

Here’s an example:  Your mutual fund issued a gain to your account in mid December totalling $1,000.  Look through your portfolio (as I mentioned in my earlier blog today) for a security whose value is at least $1,000 less than your basis (fancy term for what you paid for it, including all reinvested dividends, if applicable) and sell that security booking a $1,000 capital loss.  Your losses offset your gains (for the most part it’s that simple, although long-term capital losses-securities held one year and one day–offset long-term capital gains, and short-term capital losses–securities held less than one year and one day–offset short-term capital gains).

Finally, the federal government allows you to deduct an additional $3,000 in excess of all offsetting capital gains and losses each year against ordinary income.  If you have more than $3,000, you get to carry the excess forward to future tax years.  Some states follow the feds in the unlimited carryforward of capital losses, New Jersey, however does not.  Check with your CPA for details on this, to be sure, if you expect heavy losses in 2008.

At the end of the day, its the end of the year.  No sense in paying unnecessary income taxes.  So, while you did not actively sell any securities this year to produce a capital gain, you may be an unsuspecting shareholder who DID receive a capital gain.  There’s still time to avoid paying tax on that by “booking/realizing” an equal dollar capital loss, or even quite a bit more than the amount of capital gains, and deducting your $3,000 excess on your 2008 return and pushing the balance forward.  Yes, Ms. Dubious, there WILL be capital gains in your future, and they JUST might start in 2009!  You’ll be prepared however, with perhaps an ample supply of carried forward capital losses so you won’t have to pay taxes till they’re all used up.  Now THAT’S planning, and THAT’S effective planning.

Consult your broker and/or CPA for details.  (Most likely your fee-only financial planner has already contacted you and handled this for you.)

Related posts:

1. Things to Know about gold Bullion In these recent days, many people getting more aware on...

Related posts brought to you by Yet Another Related Posts Plugin.

<b>The dictionary defines wealth as:</b>

1. [n] – the state of being rich and affluent

2. [n] – an abundance of material possessions and resources

3. [n] – property that has economic utility: a monetary value or an exchange value

4. [n] – the quality of profuse abundance

None of those definitions sound too bad, right?  The quality of <b>profuse abundance -</b>   I like that definition!

<b>However, wealth as it is defined in the dictionary is only a small aspect of such a grand and often controversial word.</b>

<b>The definition of wealth can be quite divisive. </b> Ask your family and friends how they define wealth and then sit back and enjoy the conversation!  Ask any political candidate how they define wealth and you’ll get vastly different answers.

There is of course the <b>capitalist definition</b> of wealth which states that all wealth is earned, not distributed.

Conversely, <b>socialism states </b>that there is a more equitable distribution of wealth and wealth is better shared.

That being said, all political theories and ideologies aside, we know deep down at our core that there is more to ‘wealth’ than dollars in the bank.

Consider the following quotes:

<b>”Wealth is the ability to fully experience life.”
-Henry David Thoreau</b>

<b>”Ordinary riches can be stolen, real riches cannot. In your soul are infinitely precious things that cannot be taken from you.”
-Oscar Wilde</b>

<b>”Being rich is having money; being wealthy is having time”
-Margaret Bonnano</b>

<b>So wealth is:</b>
<b>- Having time</b>
<b>- Having health</b>
<b>- Having quality of life</b>
<b>- Possessing freedom</b>
<b>- Finding inspiration</b>
<b>- Having peace of mind</b>
<b>- Wealth is having compassion</b>
<b>- Being loved</b>
<b>- Loving</b>

<b>- And of course money in the bank – how much money in the bank is defined by you. </b>

And so on and so on.

I’d argue that wealth, <b>true wealth</b>, may be a combination of all of these things.

Wealth, when it is defined as more than simply dollars in the bank, when it is defined as quality of life, health, peace of mind and all of those things that do often come with financial security is a fine and wonderful thing.  However, each attribute of wealth i.e. peace of mind, time, passion and dollars in the bank can be at risk if one focuses one attribute to the exclusion of all others.

For example if you live solely to have more money, you’ll inevitably lose time, quality of life, and quite frequently your health.

<b>It’s a fine tightrope to walk.</b>

<b>Do you focus on earning money to support a better quality of life, to have more time and so on?</b>

Or

<b>Do you focus on quality of life and have faith that the money will follow?</b>

It’s the whole success before meaning or meaning before success question.

<b>Success before meaning.</b>

There’s a well established school of thought which dictates that you work hard, you earn a good living, build a good life and then reap the rewards of your hard work.  There are various scenarios this may entail.

For many it may entail spending 20 years working a 9-5 desk job, living frugally and saving as much money as possible.  The reward is then quitting or retiring and living the life you’ve always wanted to live.  Whether that means traveling, spending your days in your garden or workshop or starting that small business you’ve always wanted to start.

This is the place that many people come from.  They spend their lives focused on the goal of achieving financial success and freedom.

While setting and achieving goals is a great thing, <b>the problem with this mindset is:</b>

1. One forgets to enjoy life while it’s happening and waits to enjoy it at some future date.

2. That date may never come

<b>Meaning before success.</b>

Another school of thought follows the path of doing what they love and hoping or trusting that wealth will follow.

Those who follow this school of thought believe that the goal to success starts with finding a business or trade you’re passionate about.  Passion and desire breed wealth.

While it’s true that passion for your business or trade will bring about day to day quality of life, satisfaction and contentment – financial wealth isn’t a given.  In fact there are many people who are barely getting by who absolutely love what they do.

<b>Another option?</b>

I propose that there is actually a third approach to obtaining wealth without sacrificing quality of life.

<b>Starting an internet based business, yes even in today’s economy, can provide the kind of lifestyle and complete wealth you’re seeking. </b>

Starting an internet based business, while it takes a bit of time at the outset to get a business up and running, once it’s established and you’ve automated as much as you can humanly automate and delegated the rest – the profits are in your pocket and you’ve as much free time as you can humanly stand.  Time to live the life you’re dreaming of but instead of dreaming it, you’re actually living it.

<b>Time to pursue your passions.  </b>Yes, this third option means the business you start doesn’t have to be something you’re passionate about.  You can make your business your passion, however it’s not mandatory.  You can in fact sell t-shirts online, make a mint, and not give a hoot about t-shirts.

Timothy Ferriss talks at length on this in his book “The 4-Hour Workweek”.

The concept is defined as the new rich or NR as he calls them.  It’s the idea that it doesn’t have to be success versus meaning or wealth versus poverty or freedom versus being chained to a desk 9-5.  Life, and wealth, can be defined by you.

Starting an internet based business isn’t as simple as setting up a website and watching the profits roll in.  There’s a process.  There’s a science behind profiting online.  It begins with specialized knowledge.

<b>THERE are two kinds of knowledge.</b> One is <b>general</b>, the other is <b>specialized. General knowledge,</b> no matter how great in quantity or variety it may be, is of but little use in the accumulation of money.
<b>-Napoleon Hill</b>

Mr. Hill also goes on to say in Chapter Five of Think and Grow Rich, KNOWLEDGE will not attract money, unless it is organized, and intelligently directed, through practical PLANS OF ACTION, to the DEFINITE END of accumulation of money.

Now specialized knowledge is something you can possess, like knowing how to take apart and put back together a 1964 Ford Mustang blindfolded.  It is also something you can purchase or acquire.

<b>You can obtain specialized knowledge by:</b>

- Participating in a mastermind group, hiring a coach, or finding a mentor.

- Going to school or getting specialized training

- Reading everything ever published on the topic including participating in forums and chat rooms on your chosen topic.

<b>As we move through life and make our choices it’s nice to know that there are options. </b> You can choose to live your life pursuing financial wealth at the expense of the other gems life has to offer, you can choose to pursue health, art and happiness at the expense of financial wealth or you can decide that you deserve both.  You can decide that the world and its abundance are available to you.

<b>The internet makes it easier than ever before.</b>  It gives you access to specialized knowledge and wonderful tools which enable you to automate almost every process and system required to run a successful and profitable business. 

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.