For an easy time come tax season, you need to understand how capital gain taxes work. Learn what you need to know here.
Come tax time, you need to have everything in order. You need to know tax deductions, exclusions, and credits you qualify for. In addition, you need to know your exact taxable income as well as capital gains from your investments, ranging from real estate to bonds. Many people don’t know how capital gain taxes work, and they end up paying huge tax bills. To help you understand more about capital gain taxes, here are 4 things you need to know.
Factors that Determine How Much Capital Gain Taxes You Owe
Capital gains are profits from an investment. This can be from the sale of stock, business, real estate or primary home. How much these capital gains are taxed depends on your income, filing status and how long you held the asset before selling. More to that, the net profit you make from the sale, will also determine how much you pay to the tax authority. If you held the asset for more than one year, your 2020 capital gains tax rates will be either 0%, 15% or 20%. However, if you held the assets for less than a year, the capital gains tax rates will correspond to ordinary income tax brackets. However, for sale of a primary home, things are a bit different.
How to Calculate Capital Gains
Capital gain is what you gain (net profit) from your investment, and is what is subjected to taxation. You get this figure by getting the difference between the amount you get after the sale of an asset and the amount you spent to acquire the asset. If you make a loss (capital loss), that can still be factored in when filing your tax returns. For accurate calculations, the H&R Block can help you do the math, and even give you the exact capital gains tax you owe.
Real Estate Taxation
If you specialize in investment properties, your net profit from the sales will be subjected to capital gain taxes. However, for capital gains on sale of home things are be a bit different. You may be able to avoid huge taxes on your gains if you qualify. Homeowners who are single when selling their primary residence may be able to exclude up to $250,000 in capital gains. For married couples (filing jointly) this figure goes to $500,000. However, the home must have been your primary residence for at least 2 years in the last five years.
How to Minimize Your Capital Gains Taxes
One of the main ways to minimize your capital gains taxes is to hold on your asset for more than a year. This makes sure that you qualify for lower tax rates. Also, check if you qualify for home sale exclusions and take advantage of that if you qualify. Also, consider carrying losses over and using tax-advantaged accounts.
You can claim capital gains deductions you qualify for when filing your taxes come tax season. For accurate calculations and easy process, you should file your taxes online using H&R Block. This ensures you take advantage of all deductions, exclusions and credits, including capital gain deductions. As a result, you will pay a less tax bill or get the largest tax refund from the IRS.