It’s never too early to start thinking about your taxes, and with the new year comes a whole host of changes that you’ll need to be aware of. One of the biggest is the long term capital gain tax, which will come into effect in 2022. In this guide, we’ll cover everything you need to know about this new tax so that you can be prepared come next year.
What is Long Term Capital Gain Tax?
Long-term capital gains tax is a tax imposed on the sale of an asset that has been held for more than one year. The rate of tax depends on the individual’s tax bracket. For example, in the United States, individuals who are in the 10% or 15% tax bracket pay 0% long-term capital gains tax.
Individuals who are in the 25%, 28%, 33%, or 35% tax bracket pay 15% long-term capital gains tax. And, finally, individuals who are in the 39.6% tax bracket pay 20% long-term capital gains tax.
Who Pays Long-Term Capital Gains Tax?
Generally, anyone who sells an asset for more than they paid for it will owe long-term capital gains tax. This includes stocks, bonds, real estate, and other assets. The tax is owed on the profit made from the sale, not the total amount of the sale.
There are a few exceptions to this rule. For example, if you sell your home, you may not owe any capital gains tax on the sale. This is because there is a special exclusion for primary residences. There are also a few other exceptions for things like collectibles and small businesses.
If you do owe long term capital gains tax, the rate you pay will depend on your income. For most people, the rate will be 15%. However, if you have a very high income, you may owe 20% or more.
How Much is Long-Term Capital Gains Tax?
The long-term capital gains tax is a tax that is levied on the profits that you make from selling an asset that you have held for more than one year. The long-term capital gains tax rate is 20% for most taxpayers. However, there are some exceptions. For example, if you are in the 10% or 15% tax bracket, your long-term capital gains tax rate will be 0%.
If you are subject to the long term capital gain tax, you will need to pay it when you file your taxes for the year in which you sold the asset. For example, if you sold an asset in 2020, you would need to pay the long-term capital gains tax when you file your taxes in 2021.
The long-term capital gains tax can be a significant expense if you are not prepared for it. However, there are ways to minimize the amount of taxes that you owe. For example, you can invest in assets that are classified as “tax-advantaged” investments. These include things like municipal bonds and certain types of mutual funds.
You can also invest in a Roth IRA. With a Roth IRA, you will not owe any taxes on your profits when you withdraw.
When is Long Term Capital Gain Tax Paid?
Long-term capital gains tax is paid on profits from the sale of assets that have been held for more than one year. The tax rate on long-term capital gains is lower than the rate on ordinary income, so it can be advantageous to hold onto assets for at least a year before selling them.
Capital gains are calculated by subtracting the original purchase price of an asset from the sales price. If the resulting number is positive, then it is considered a capital gain and is subject to taxation. If the number is negative, then it is considered a capital loss and can be used to offset other capital gains.
Long-term capital gains tax rates are tiered, with higher rates applying to higher levels of income. For example, in 2020, the long-term capital gains tax rate for individuals in the 10% and 12% tax brackets is 0%. The rate increases to 15% for those in the 22%, 24%, 32%, 35%, and 37% tax brackets. And finally, the highest rate of 20% applies to those in the 39.6% tax bracket.
Certain types of assets are exempt from long-term capital gains tax, including qualified retirement accounts, certain life insurance policies, just to name these few.
How to Reduce Your Long Term Capital Gain Tax
If you’re looking to reduce your long-term capital gains tax, there are a few things you can do.
First, invest in assets that are eligible for the capital gains exclusion. This includes things like your primary residence, certain small business stock, and certain types of bonds.
Second, take advantage of tax-advantaged accounts. These include accounts like IRAs and 401(k)s. Investing in these accounts can help you reduce your overall tax liability.
Third, consider selling assets that have appreciated in value. By doing this, you can realize the gain and pay the lower long-term capital gains tax on it.
Fourth, invest in assets that qualify for the lower long-term capital gains tax rate. These include things like stocks, bonds, and mutual funds.
Finally, consider using a professional tax advisor to help you minimize your long-term capital gains tax liability. They can help you take advantage of all the deductions and exemptions available to you.
Bottom Line
The long term capital gain tax can be a confusing concept, but hopefully this guide has helped to clear things up. In short, the long term capital gain tax is a tax on the profit from the sale of an asset that has been held for more than one year. The rate of the tax depends on a number of factors, including your income bracket and whether the asset is considered collectible.
If you are thinking about selling an asset, it is important to consult with a tax professional to ensure that you are properly prepared for the long term capital gain tax.
