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Capital Gains
Tax
most common capital gains are realized from the sale
of stocks, bonds, precious metals and real estate property. Not all
countries favor the implementation of a capital gains tax.
In the United States for instance, individuals and corporations pay an income tax on the net total of all their capital gains just as they do on other types of income, but the tax rate for individuals is lower on investments in long-term capital gains, which are gains on assets that have been possessed for over one year before being sold. The tax rate on long-term gains was reduced in the year 2003 to 15%, and to 5% for individuals in the two lowest income tax brackets. Short-term capital gains however are taxed at a higher rate which is the ordinary income tax rate. By the year 2013 these reduced tax rates will reduce and revert back to the rates that were in effect before the year 2003, which would generally hover around 20%. Technically, what is known as a cost basis is what is used, rather than the simple purchase price, to determine the taxable amount of the gain. The cost basis is used to denote the original purchase price, adjusted for various factors including additional improvements or investments, certain fees, taxes paid on dividends, and depreciation.
Exemptions from capital gains taxes or CGT in the United States include the following:
o An individual can avail of an exclusion of up to
$250,000 ($500,000 for a married couple filing jointly) of capital gains
on the sale of real property if the owner used it as primary residence for
two of the five years before the date of sale. The two years of residency
need not have to be continuous. You can meet the ownership and use
criteria during different 2-year periods. However, you must meet both
tests within a contiguous 5-year period ending on the date of the sale.
There are various allowances and exceptions for different situations
including military service, disability, partial residence and other
reasons.
o If an individual or corporation
undergoes both capital gains and capital losses in the same year, the
losses cancel out the gains in the calculation of taxable gains. For this
reason, towards the end of each calendar year, there is a tendency for
many investors to dispose off their investments which have lost value.
For individuals, if the losses exceed gains in a year, these losses can be claimed as a tax deduction against the ordinary income of up to $3,000 per year. Any additional net capital loss can be carried over to the next year and again cancelled out against gains for that year. Corporations are permitted to back date capital losses in order to off-set capital gains from prior years, thus earning a retroactive refund of sorts on capital gains taxes.
The Internal Revenue Service or IRS allows individuals to defer capital gains taxes using tax planning strategies such as the charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange.
The United States is different from other countries in the
sense that its citizens are subject to a U.S. tax on their worldwide
income no matter where in the world they reside. These citizens therefore
find it difficult to take advantage of the various options of protection
offered by personal tax. Though there are some offshore bank accounts that
advertise as tax saving, U.S. law requires reporting of income from those
accounts as well and failure to do so constitutes tax evasion and the
legal implications that ensue.