Updated: May 4
Did you know that almost everything you own, whether it is personal or business, is considered a capital asset? Examples of personal capital assets are: home, recreational vehicles, stocks and bonds. Business assets include but are not limited to: buildings, tractors, trailers, and other business equipment.
When a capital asset is sold, the difference between the original cost basis and the sale price may be a taxable gain and reported on the year-end tax return. Remember all capital gains must be reported. However, personal property losses cannot be deducted, only investment property (i.e. stocks, bonds, rental property, etc.). When thinking about selling a capital asset the taxpayer should determine what the tax implications will be. The following are some tax strategies that may help you in planning for the tax year.
3.8% Net Investment Income Tax (NIIT): In 2010, under the Health Care and Education Reconciliation Act, high income taxpayers will be subject to an additional 3.8% Medicare tax beginning in 2013. Taxpayers with Modified Adjusted Gross income (MAGI) over $200,000 ($250,000 for married filing jointly and $125,000 for those filing married filing separate) per year may owe the new Medicare tax. Many of the strategies that can help you save capital gains taxes can also help you save the on the additional Medicare tax.
Use losses: Capital losses can offset capital gains. Consider selling any assets that are currently at a loss and are unlikely to appreciate, in order to use the loss(es) against any capital gains you had during the tax year. If your capital losses exceed your capital gains, then your capital loss is capped at $3,000 and the remaining loss is carried over to subsequent years.
Hold onto the asset: Short-term assets are any assets that have been held for one year or less. Conversely, long-term assets are any asset held for more than one year. If you consider selling your short-term assets, keep in mind the gain from the sale will be subject to ordinary income tax rates and not capital gain rates. The current maximum ordinary tax rate is 39.6%. The long-term capital gain tax rates are 15% or 20%. Increasing the holding period of an asset from short-term to long-term will reduce the taxes imposed on any gain from the sale of that asset.
0% tax rate: Lower income individuals may have a 0% tax rate on long-term capital gains. If your taxable income falls within the 10% or 15% tax bracket, it may make sense to sell the long-term capital assets you’ve been on the fence about.
Like kind exchange: If you’re debating selling a business asset, consider instead to trade the asset for a like-kind asset. Generally, the capital gain from the sale of an asset will be deferred if the asset is traded for another asset in a like-kind exchange.
Tax planning is about looking at the big picture. It’s about looking at all your investments personal and business and adjusting the treatment of each business or investment property. Remember to make your investments work for you not against you.