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Capital Gains in the US

Almost everything you or your business owns is classed as a capital asset. When a capital asset is sold the difference between the basis, which is generally it’s cost and the amount it is sold for is a capital gain or a capital loss. The capital gains tax rates are determined by the type of investment asset and the holding period of the asset. Capital gains can be deferred or reduced by using the proper sales method and/or a IRS approved tax planning technique.

Examples of tax planning strategies that the IRS allows for individuals to defer capital gains are;

- Deferred Sales Trust – this allows the seller to defer capital gains due at the time of a sale over a period of time
- 1031 exchange – this allows capital gains to be deferred forever by buying a replacement real estate by a business, but not for personal real estate
- Structured Sale Annuity – this allows capital gains to be deferred or reduced while gaining safety and a stream of guaranteed income
- Charitable Trust – defer or reduce capital gains by giving equity to charity
- Self Directed Instalment Sale – this allows for the deferral of capital gains taxes while removing the risks from buyer default under a traditional instalment sale

Short – Term Capital Gains

- Capital gain income from assets held one year or less is taxed at the ordinary income tax rate in effect for that year, these range from 10%-35%
Long –Term Capital Gains
these depend on which ordinary income tax bracket you fall under
- Zero percent rate if your total income, including capital gain income, places you in the 10% or 15% tax brackets
- Fifteen percent rate if your total income, including capital gain income, places you in the 25%, 28%, 33% or 35% tax brackets
- Twenty percent rate if your total income, including capital gain income, places you in the new 39.6% tax bracket

Dividends rates depend on whether these are ordinary dividends or qualified dividends. Ordinary dividends are taxed at ordinary tax rates for whatever tax bracket you are in. Qualified dividends are taxed at the long term capital gains tax rates of 0% or 15% rate.

If tangible property has depreciated in value then this is subject to a special depreciation recapture tax. A special 25% tax rate applies to the amount of gain that is related to depreciation deductions that were claimed or could have been claimed on a property. Any remainder of the gain will be taxed at ordinary rates or long term gain rates depending on how long the property was held.

In addition to the federal capital gains tax, you may also be subject to state income taxes. Some states do not have a separate capital gains tax and instead will tax your capital gains as ordinary income which will be subject to the state income tax rates. These vary and some have no state taxes at all.

For more information regarding state taxes please see – Benefits of a US Company.

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