Capital Gains Tax Isn't Just for Rich People - Law and Daily Life
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Capital Gains Tax Isn't Just for Rich People

Presidential candidate Mitt Romney's tax returns have called attention to capital gains. As you probably now know, capital gains are usually taxed at a lower rate than other types of income -- but they're not just for the super-rich.

Anyone with a capital asset can claim a capital gain when that asset is later sold, according to the Internal Revenue Service. A "capital gain" is how much money you made by selling the asset. (However, if you lost money in the deal, and it's investment property, it's called a "capital loss.")

So what is considered a capital asset? And can you claim the sweet 15% capital-gains tax rate like Mitt Romney does?

The answer depends on many factors, and involves some arithmetic. Here's what the IRS says about capital gains and taxes:

  • Almost all of your property, held personally or as an investment, can be considered capital assets.
  • When a capital asset is sold, the difference between the sale price and your basis (usually the purchase price) is a capital gain or loss.
  • If you held the capital asset for more than a year, your gain or loss is considered "long-term." Otherwise, it's "short-term."
  • Subtract your long-term losses from your long-term gains -- that's your net long-term capital gain.
  • Add up your short-term capital losses, and any long-term capital losses carried over from last year. Subtract these losses from your net long-term capital gain to get your "net capital gain."

Net capital gains are taxed at different rates for different taxpayers. The maximum rate for most people is 15%, but for those with lower incomes it could be as low as zero. However, some types of net capital gain may be taxed at higher rates of 25% or 28%.

See how complicated it can get? That's why it may be wise to consult a tax attorney about your best options for reporting capital gains on your taxes, even if you're not as rich as Mitt Romney.

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