CAPITAL GAINS TAX
Of all the taxes levied on a populace by the Government, the Capital Gains Tax (CGT) is perceived as unfair as it taxes an investment you have made. For eg. If you say, purchase a painting for $50,000, it is a source of pride, joy and you enjoy it as a work of art. If perhaps you sell it in times of constraint or otherwise for a profit at say, $90,000.
The difference in the actual cost and selling price is termed as capital gain. The tax applicable on the capital gain is the capital gains tax.
Capital gain tax is a voluntary tax as you pay only when you sell an investment. No tax is accrued if you hold on to the investment, which is termed as the 'lock in effect'.
The capital gains tax is levied on assets which are termed as Capital Assets namely antiques, paintings, sculptures, jewelry, coins, stamps, homes, farms, businesses, stocks, shares and mutual funds. Capital gains tax depends on the investment and the time period for which it is held. Some capital gains are taxed at special tax rates and some gain tax exemption.
Types Of Capital Gain Tax
Short Term Capital Gain Tax
Short term capital gain is tax applied on an investment you hold for a year or less. Short term capital gain is taxed at individual tax rates. For different persons with varying incomes the tax bracket differs and hence whichever tax group you find yourself in, short term capital gain is taxed at the relevant tax limit. In a recent amendment an exception was made for equity shares and mutual funds where the short term capital gain tax will be a flat 10%.
Long Term Capital Gain Tax (LTCG)
Long term capital gains tax (LTCG) is the tax accruing on an investment held for more than a year. Some forms of long term investments qualify for a tax rebate. In long term capital gain the tax is 5%-15% depending on which tax group you belong. Pieces of art, jewelry, stamps, coins and other collector items attract a flat 28% tax on the capital gain. Real estate is either classified as short term capital gain or long term capital gain depending on how long you have lived in it. A primary residence, where you have lived for more than three years can merit an exclusive capital gain rebate of $250,000 to $500,000.
Long term capital gain is taxed at 5% for taxpayers in the 10%-15% tax group. A 15% tax for taxpayers in the 25%, 28%, 33%, and 35% tax groups.
Capital Gains Tax In U.S
In the U.S. capital gain tax is levied on individuals and corporations depending on their total net worth of all capital gains. The tax rates for individuals and corporations are different and individuals are taxed at a lower rate for long-term capital gain. In2003 the tax rate on long term capital gain was reduced to 5%-15% for people in the low-end tax groups. In 2011this tax rebate will revert to its original tax, which prevailed before 2003, that is a flat 20% for all.
The Tax Reconciliation Act signed by President Bush in 2006 enabled a 0% tax on capital gains for people in the 10%-15% bracket. This tax rebate will continue throughout 2007, 2008, 2009, and 2010. From 2011 tax will be charged at 20% for all peoples.
Deferring The Capital Gains Tax
To pay your taxes is the mark of a good citizen and one should endeavor to pay your dues to the government. The IRS allows you to defer capital gains tax with proper tax planning and sales method. Some options are available and mooted by the government to defer capital gains tax.
Deferred Sales Trust:
If you sell an asset you can defer capital gains tax due at the time of selling for over a number of years.
1031 Exchange:
Defer capital gains tax by exchanging for 'like' type of property.
Structured Sale Annuity:
Structured sale annuity is the usual installment sale method but with a safety net for the seller. You can defer capital gains tax to a future time as well as collect sure payments for a number of years.
Charitable Trust:
The proceedings of the sale can be turned over to a charity thereby reducing capital gains tax.
Installment Sale:
The usual method of selling where the sale of an investment acquires payment in the year after sale occurs so you can defer capital gains tax for the year the payment is made. It offers no protection from defaulting buyers.
Self directed Installment Sale:
In this type of sale you establish a partnership with a trusted party with a 1-% interest and you hold 99%-limited membership. The trusted Party forms a trust, which pays you installments over a period of time after the sales have occurred. You can defer capital gains tax by this method as well as ensuring a continuous source of income.
