Knowledge of Capital Gains Rates Can Help You Reduce Taxes

Most of us are familiar with the taxes that we pay on the money earned through our jobs – ordinary income such as wages, salaries and commissions. Normally, the tax amount that we owe is calculated and withheld by our employer and sent to the Federal government, and usually the state and local government as well, without us having to worry about it.

But what about when you earn money simply by selling something that you own – such as property, stocks, mutual funds, bonds and other capital assets that are not in a tax-deferred account such as an IRA – that has increased in value since you purchased it? These increases in value are called capital gains. Generally, for most taxpayers, the tax rate on capital gains is much lower than on ordinary income. Fortunately, the taxes on capital gains are normally easy to calculate, and with knowledge of how capital gains tax rates work, you can save a significant amount on your tax bill.

Short-Term vs. Long-Term

The most important consideration when determining your capital gains tax rate is whether it is a “short-term” gain or a “long-term” gain. The difference? A day. Short-term gains are the profits you made from selling an asset that you owned for one year or less, and long-term gains are profits you made from selling an asset that you owned for a year and a day or more. The amount of time for which you owned the asset is known as the “holding period” and it’s why proper recordkeeping is crucial. Additionally, knowing the holding period for your assets helps you plan when to sell, and since there is such a small difference between short-term and long-term gains, waiting to sell until the holding period is more than a year can mean a rather large savings in taxes.

Taxes on Short-Term Gains

The tax rate for short-term gains – with the exception of a few special circumstances that we will discuss below – is your marginal tax rate, meaning that is the same as the rate that you would pay on income. Unfortunately, if you have a short-term gain, the tax treatment that you receive will be no more favorable than if the money had come from wages. For this reason, most investors choose to hold their investments long enough to qualify them for the long-term gains rates.

Determining the Tax Rate on Long-Term Gains

If you have a long-term gain, congratulations! You’re now able to claim one of the lowest tax rates on any kind of income available under the current tax code. Long-term gains are taxed at either 15% or nothing, depending on which tax bracket you fall into for that year.

What’s Your Tax Bracket?

To determine the tax rate of your long-term capital gain, you must first figure out which tax bracket you will end up in for the year. The amount of income that you can earn before having to pay capital gains taxes depends on how you file your taxes. (Note that your income level includes the income earned from your capital gains, as well as any other income that you earned or received during that year.) If you file as single, you can make up to $34,500 (for 2011) before paying capital gains taxes. If filing as married filing jointly or as a qualified widower, you can make up to $69,000 (for 2011), and if filing as married filing separately, you can make up to $34,500. Those filing as head of household can make up to $46,250 without paying capital gains taxes on long-term gains.

If your total income (which, again, includes the capital gain itself as well as all other income) exceeds those amounts then your tax rate on the capital gain is 15% of the gain.

Just Over the Line?

Keep in mind that if your income without the capital gains is less than the above amount that applies to you, and adding the capital gains puts your total income amount over the line, then you will only pay the 15% rate on the amount of capital gains that is over the line. For example, if you are single and your other income totals $31,000, but you have $5,000 in capital gains, your total income is $36,000, which means that you have to pay the 15% rate. However, you only have to pay the 15% rate on the amount above the maximum – so you will end up paying 15% tax on $1,500 in capital gains, as opposed to $5,000.

Notable Exceptions to the Rules

As with all IRS regulations, there are several circumstances under which special rules apply. The most common situations that cause people to run into tax problems are profits on primary residences, profits on collectibles, and dividends.

Profit on a Primary Residence

If your primary residence has increased in value, you may be looking forward to booking a tidy profit when you sell, and as long as you meet certain restrictions, you will not owe capital gains taxes on that profit. In order to qualify for this tax break, you must have lived in the home for at least 24 months out of the previous five years. However, if you must sell your home because of a job relocation or due to health problems, you may still qualify even if you have not lived there that long.

If you are single, you can take in up to a $250,000 profit tax-free from the sale of your home, and if you are married, you can pocket up to $500,000 tax-free in profit. Any amount of profit that you make in excess of those points is treated as a capital gain.

Profit on Collectibles and Precious Metals

This is another reason that collecting Precious Moments figurines might not beat the stock market. Regardless of how long or short of a time you have owned an item, the profit on collectibles that you own for investment purposes is taxed at 28%. If you fall within the 33% or 35% tax bracket, a short-term gain, this actually helps you out a little bit since 28% is the maximum.

Also, for those of us who like to invest in gold and other precious metals as a hedge against the stock market (or inflation, depending on how you look at it), whether it’s in coins or Exchange Traded Funds (ETFs), the IRS considers these to be collectibles as well. (Note that closed-end precious metal funds are not ETFs but are taxed as capital gains). So even though your gold ETF is managed like a stock, it is taxed like a Beanie Baby.


Many people slip up when reporting dividends because they assume that since they’ve owned the stock for years, they can report all the dividends as a long-term gain. However, that is not the case. Ordinary dividends are taxed as ordinary income and therefore do not qualify for special long-term gain tax rates. However, qualified dividends can be taxed at long-term rates and will be separated out for you on your 1099-DIV.


The Tax Benefits of an S-Corp

If you are planning to open your own business you will have many things on your mind.  Normally the last thing people think about is taxes.  However, tax planning on the front end can give you more money in the long run.  Unfortunately, many small business owners do not know this.

Want to hear more?  Then read on.

Many small business owners incorporate their business; sometimes they start out as a partnership or sole proprietorship.  Neither has limited liability, but people do not worry about that at the beginning, even though they should.  Others choose to operate as a Limited Liability Company (LLC) and allow everything to flow through to their personal returns.

Okay, so what is the big deal?

The first point is that LLC’s can be (and often should be) taxed as S-Corporations.   An S-Corp is meant for a company with less than 100 shareholders, which in essence are most small businesses and even larger businesses in the country today.  Therefore, most people can choose to have their LLC taxed as an S-Corp.   Normally you have to file form 2553 with the IRS to elect the S – Corp taxation.

The second point is that you could just create an S-Corp from the beginning, but often people do not like this because of the increased costs normally associated with creating one versus an LLC.  It does not really matter for tax purposes since LLC’s can be taxed as S-Corps.

So now we know that starting a business as an S-Corporation is good….. but why?

The savings is in the self employment taxes that are normally assessed if not taxed as an S-Corp.


Say your company has a net profit to you of $100,000.   If you are not an S-Corp, you will have to pay about 15% in self employment taxes which equates to taxes of about $15,000.

Now, in an S-Corp the owner has to take a “reasonable wage”, so let us say $40,000 is deemed that. Your tax bill will be 40,000 x 15% = $6,000.   This is a tax savings of $9,000!

So, how is this possible?

The other $60,000 is deemed a distribution and not a wage; therefore the self employment taxes are not assessed.  I bet you are thinking that you could call the whole $100,000 a distribution and take no wage.  Not so fast my friends.

The IRS is careful to examine S – Corporations to ensure they pay a reasonable wage.  Now, that varies quite a bit, so by at least being reasonable greatly reduces your chances of being audited.

Some forget this and take no wage, so guess who gets audited first?

Are there disadvantages to an S-Corp?

The main disadvantages of the S-Corps is the complexity involved could require higher fees for professional services such as a CPA or attorney.  However, the savings often outweigh the additional costs.

There are many things to consider before starting your business though.  It is always best to contact multiple professionals to get each perspective on the situation.  A lawyer and CPA have different backgrounds and may have different advice.  So be sure to fully explain you situation and hopefully you can come to a conclusion on how to proceed.

So do not forget about being taxed as an S Corp.   It could save you lots of money!


18 Tax Credits and Deductions (and How to Get Them Next Year…)

Tax season has wrapped and if you’re like most Americans, you’re doing everything you can to make sure as much money as possible stays in your wallet next year – that is where tax credits and deductions come into play!

But first, let’s get a couple things straight. We’ll be covering two different things – a tax deduction and a tax credit. These two things are commonly confused and can make a big difference in your return. So what’s the difference?

A tax deduction reduces your amount of taxable income for the year, while a credit helps reduce the amount of taxes that you actually pay. Deductions usually come in the form of a percentage, whereas credits are a flat-dollar amount.

Alright, let’s dig in!

12 valuable tax deductions

Let’s start with deductions. When preparing your taxes, you can choose to take the standard deduction or itemize your deductions. According to the IRS, more than 60% of taxpayers take the standard deduction, which could be leaving money on the table. If your deductible expenses are more than $5,700 for singles or $11,400 for married couples (jointly filing), consider itemizing instead.

Below, you’ll find several deductions you should consider when doing your taxes, from college expenses to health premiums.

  • College costs – Families can deduct up to $4,000 of college tuition and fees (through 2011). However, if your adjusted gross income is between $65,001 and $80,000 as a single person or between $130,001 and $160,000 as a joint filer, you have a reduced deduction of up to $2,000.
  • 529 college savings plan – These are a great way to put away money for your childrens’ education, while saving money in taxes. This year, Internet access and computers are considered a “qualified education expense,” so they can be paid for tax-free.
  • Educational materials – If you’re a K-12 teacher, you can deduct up to $250 for classroom expenses like books, supplies, and computer equipment.
  • Sales and income tax – You can write off either your sales tax or income tax. If you live in a state like California or New York that has a high income tax, it’s probably to your benefit to claim sales tax instead. Additionally, states like Florida, Washington, and Texas don’t have income tax so be sure to take the sales tax deduction when filing.
  • Student loan interest – If a child isn’t claimed as a dependent, they can deduct up to $2,500 of student loan interest that’s paid by parents.
  • Mileage – Miles driven for work can be a huge deduction that saves you quite a bit of money. You can claim 50 cents per mile for business, 16.5 cents per mile for moving and medical, and 14 cents per mile for charitable.
  • Charitable giving – The percentage of charitable contributions that can be deducted is based on your tax rate. Be sure to keep tedious records of all cash contributions including a canceled check, name of the charity, and bank records that state the charity’s name, date, and the amount of the donation.
  • Home refinancing – Any points paid to refinance your home is deductible over the life of the loan. For example, if you refinance for 20 years, you can deduct 1/20th of the points each year. 
  • Last year’s tax return – If you paid money to the government last year, make sure to deduct it on your return.
  • Tax software and fees – Any fees you paid to a tax attorney or spent on tax software can be deducted – just be sure to keep good records.
  • Job-hunting costs – Job-hunting costs can be deducted (up to 2% of your adjusted gross income if your job is in the same line of work as you were doing previously). These include things like employment agency fees, printing costs of resumes and business cards, postage, and travel expenses if an interview took you away from home overnight. 
  • Investment losses – Up to $3,000 of investment losses can be deducted against your income (if your losses exceed your gains).

6 tax credits to save you money

Now that we’ve covered deductions, there are also a lot of tax credits available for this year’s taxes that can help your wallet. These fall into categories like home improvement, education, energy efficient upgrades and more. We’ve outlined the general guidelines for these credits, but be sure to check with your tax professional or the IRS website for specific restrictions when you file taxes online.

Children-related credits:

  • Child and dependent care credit – This includes any expenses paid for the care of children under 13, or a disabled spouse or dependent, to allow you to work or look for work. You can claim up to $1,050 per child or $2,100 for two or more children. The credit for 20-35 percent of your childcare expenses up to $6,000.
  • Child tax credit – This is for people with qualified children (up to $1,000 per child), and can be claimed in addition to the child and dependent care credit. To qualify, children must be under 17 at the end of the tax year.
  • American opportunity tax credit – Students can get a $2,500 higher education credit for their first four years of college. This includes 100 percent of the first $2,000 spent on tuition, books, and related expenses; and 25 percent of the next $2,000 spent.

Work-related credits:

  • Making work pay credit – This credit is equal to 6.2 percent of your earned income, with a maximum of $400 for singles or $800 for married joint filers. For single filers, the credit phases out between $75,000 and $95,000 adjusted gross income; for joint filers, between $150,000 and $190,000. 
  • Earned income tax credit – This is a refundable credit for those who have earned an income from wages, farming, or self-employment. Age, income, and the number of qualifying children determine the amount of the credit. To qualify, married couples filing jointly must have an earned income of less than $48,362 and singles under $43,352.
  • Saver’s credit – This credit is designed to help those with a low to moderate income save for retirement. If your income is below a certain limit and you contribute to a workplace retirement plan or IRA, you may qualify.

Using even a few of the deductions and credits listed above can save you a lot of money during the upcoming 2011 tax season. For additional details on the credits and what’s eligible, contact your tax professional.


Tax Tips for Parents

Since raising children can come with a heavy tab, the government offers certain financial benefits for parents.  The IRS recently laid out some ways you can save money come tax time if you are a parent.  These benefits come in the form of various tax deductions and credits.

In most cases, your children depend on you for all their basic needs.  Since they are “dependents,” you can receive a slew of tax breaks.  Though there are certain criteria your children must meet to be considered dependents, they are not very restrictive.  As a result, most people raising children will qualify for the benefits.  There are several other instances where your children can reduce your tax bill as well.  For instance, if your child is under the age of 17, you may qualify for a $1,000 Child Tax Credit.  However, you have to fall within a certain income bracket.

Anyone who has worked while raising a child knows it can be a challenge.  The government tries to make that task a little easier by reducing the tax bill for parents who work.  If you are a low to moderate income earner, you may be able to get the Earned Income Tax Credit by filing a W-5 Form.  The credit rewards earning an income while parenting.  Parents sometimes have to hire a helping hand to care for their children while they work.  The government tries to reduce that cost by offering a tax credit if your child is less than 13 years old and you had to hire someone to care for him or her.

As children grow older, parents frequently pay for higher education.  If your child is a student at a college or university, you may be able to receive the American Opportunity Tax Credit.  This is a credit for undergraduate college expenses.  The Lifetime Learning Credit also provides a credit for higher education expenses.  If your child took out a student loan and you pay interest on that loan, you may qualify for an additional tax deduction.

There are other less common instances where parents can save money on taxes due to their kids.  If you adopted a child, you may qualify to receive a credit of $12,150.  This credit is provided to help cover expenses related to the adoption process.  The government also tries to help self-employed parents pay for health insurance.  If your child is under the age of 27, you may be able to deduct premiums you paid for health care coverage.

Lastly, you should be aware that your child might have to file their own tax return in certain circumstances even if they are listed as a dependent.   If your child earned more than $5,700 in income the past year, they will have to file a tax return.  Similarly, if your child earned income from investments, interest, and dividends in excess of $1,900, it may be taxed at your rate.

Sorting through these various tax breaks, credits, and deductions can get confusing.  However, if you are a parent, it might be worth your time to look into the details of these benefits because they can significantly reduce your tax bill.


Pad Your Wallet: Receipt Storage Can Help

Most of us have resorted to storing receipts in bulky filing cabinets, envelopes, and folders in futile attempt to stay organized and make filing taxes a little easier. However, updating to a paperless filing method will end up saving you time, money, space, and the environment. Receipt scanners are one of the most practical and economically sound purchases you can make. Whether you’re filing receipts for your personal tax records or for your business, receipt scanners will help you stay organized and efficient.

Scan Receipts to Make Tax Filing Easier

Scanning receipts right away prevents you from spending hours wading through lots of barely-distinguishable papers with ambiguous fine print. Scanning your receipts regularly means you can ditch your filing cabinet and shoe boxes full of paper and take back the functional space in your home or office. Receipt scanners are widely available in office supply stores and there are even several different apps for iPhones and other mobile phones that can read the data from receipts and keep records for you.

The software that comes with your receipt scanner can sort your receipts for you by category or venue. When it comes time to write off donations or groceries, this can save hours of work you would otherwise spend shuffling through piles of receipts.

After scanning your receipts, most receipt scanner software will let you upload the file to any storage unit, including USB drives, cell phones, and other nifty gadgets you can bring with you and access from anywhere. When sending in the receipts, being able to send the file to the IRS is much handier than sending bulky envelopes as proof for tax credit. Regularly scanning receipts means you run less of a risk of losing them between now and when you file for your tax refund – and it optimizes the amount of money you can get back.

With this convenient and efficient scanning system, Turbo Tax and other tax programs can help you qualify for tax credits payment discounts you may not even know you had. Staying organized can make sure your annual expenditures are well-documented and give you back everything they can.


A Guide to Properly Prepare for This Year’s Tax Filing

As most U.S. taxpayers will readily agree, tax time is not very much fun. This is just as true for individual taxpayers as it for businesses, although the potential mounds of paperwork, receives, W9s and the like that many businesses have to wade through make them much less enviable. Even now with the tax season approaching, many people simply do not take appropriate steps to ensure that their tax filing will go smoothly. This leads to needless headaches and a lot of frustration. By simply taking the time to organize your tax information, the task quickly becomes much less difficult.

As you are receiving those W-2s, 1099s and other tax documents, take the time to create a guide to help you prepare for filing taxes.

Organize Your Tax Documents

The following should be included in any basic guide, so take a look at them and consider them important steps on the road to better tax filing preparedness.

  1. Get those tax documents organized: It makes sense to get things organized as soon as you can so that you can more easily identify problems and errors in the tax documentation. Most of the documents, including W-2s, 1099s, 1099Bs, 1098s and interest/dividend reports, should have been sent to you in January. Be sure you contact the appropriate company if you have not received them by now. Organization is essential to reducing errors and cutting down the time needed to get tax forms filled out. Additionally, it is a good idea to keep all of your documents together in a designated container or form of storage.
  2. You should do relevant tax code research: It is not uncommon to see changes to the tax codes on a yearly basis, including the issuing of different tax credits and other deductions. This makes it important to keep up-to-date on this type of information in order to ensure that you are taking advantage of all of the benefits available to you and that you receive the deductions and credits that you’re eligible for. A good starting point for research is the IRS website.
  3. Make an information checklist: Prior to doing your taxes, be sure you have taken the time to put all of the relevant information you have on a checklist in order to ensure that you do not miss any steps in the process. While lists may vary some, here are some of the more common pieces of info you’ll need: your social security number; your bank account numbers and routing numbers; your tax documents (W-2s, 1099s, etc.); additional tax data, such as property taxes, self-employment tax, estimated taxes, interest paid on school loans or mortgage, and so on. You may need EFTPS info if you plan to file electronically.
  4. Get help when needed: In some cases, doing your own taxes may simply not be worth it. After all, the tax code is notoriously hard to understand. Few of us want to dig through hefty tax documents to find out what’s necessary to file. Instead, it may be better to contact a tax professional to help you avoid errors and resulting penalties.

Keep Informed

The most important thing to remember is that being properly informed about tax filing will drastically help you when it comes time to file. If you want to be better prepared, then heed some of the instruction presented in this short guide. If you need more help, talk to an expert and enter the tax season with a plan and the confidence to get the process done right.