Your Capital Gains Tax Rate

It’s a great time to invest in the stock market – with the recession crash peaking, stocks are severely undervalued across many markets, and pretty much every economist on Earth is predicting an eventual return for prosperity in the long run. If you have available liquidity, you may have considered delving into investment, but like many people you should be concerned about the ancillary costs and worries involved. One thing that deters many first-time investors is not understanding their capital gains tax rate. Capital gains tax is levied by the Federal Government at a lower rate than income, but it’s there nonetheless, and you should protect yourself from it. This guide will help you understand where you fit into the capital gains tax rate brackets and hopefully help you keep a few bucks out of the hands of Uncle Sam.

One of the best things to happen to the capital gains tax rate came courtesy of President George W. Bush in 2006, when he signed the Tax Reconciliation Act into law. Recently extended until 2010, this act reduced the capital gains tax for taxpayers in the 10% and 15% brackets to nothing. That’s right, if you’re in the lowest income tax brackets, you will pay absolutely nothing on dividends from your investments. This is obviously good news for lower-income families looking to set aside some money for their future. This will also help retirees use their investments in their senior years to pay for their care and medical expenses.

In addition, the Tax Reconciliation Act gave an even bigger cut to the capital gains tax rate from the highest earners. Formerly in the 25 to 35 percent range, tax on their earnings have now been dropped to a baseline 15 percent. This represents an enormous amount of money, as these high-income individuals and families are more likely to invest a portion of their earnings. These rates are for long-term capital gains, however, so to take advantage of the reduced tax rate, you must in most cases hold on to the assets in question for over one year.

Interestingly enough, there are a few types of asset that have slightly different capital gains tax rates. For instance, cash made from the purchase of collectables is levied at the higher 28 percent rate. This includes stamps, works of art, antiques, and even wine. That rate also applies to the sale of stock from Federally qualified small businesses.
Understanding your federal capital gains tax rate can be a tricky proposition, but with it in hand you can move forward as a confident – and cheap – investor. Good luck on the market and on tax day.