Capital Gains Tax - Part 1

The capital gains tax is designed to get you when you have made a profit on an asset that you have held for at least one year and that has appreciated since you bought it

How long should you keep your tax return? The IRS has three years (the period of limitations) to audit your return, so you'll want to keep tax returns for at least four years (but if you have the space, seven years is better). Keep all of your W-2s until you have the opportunity to reconcile them against your social Security statement.

The capital gains tax is designed to get you when you have made a profit on an asset that you have held for at least one year and that has appreciated since you bought it. The lower your tax bracket, the lower the capital gains tax. If you are in the 15 percent bracket, your capital gain is taxed at 10 percent. If you purchase an asset after 2000 and hold it for five years, the capital gains tax will only 8 percent. There is a special rule only for individuals in the 15 percent bracket that, if you purchased an asset in 1999 and hold the asset or five years, you could be eligible for the lower rate of 8 percent.

If you are in the 28 percent or higher bracket, your maximum capital gains tax will be 20 percent. For assets acquired after December 31, 2000, and held for five years, the maximum capital gains tax will be 18 percent. My only comment here is that you are dealing with the IRS, Congress, and the U.S. tax code. Go with the flow!

Now, if you have an investment that loses money and you sell it, you have a capital loss, and the loss is allowed to offset your capital gains. If you suffer more in losses than you have made in gains, you will be able to use the loss against ordinary income up to $3,000 for the year. If you still have losses left over, they can be carried forward to be used in another year.