Capital Gains Tax

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Capital Gains Tax

The tax rates that apply to capital gain income is generally lower than the rates that apply to other income. These lower rates are applied to net capital gain, which is defined as the amount by which the long-term capital gain exceeds short-term capital loss.

The capital gains get taxed at the lower of the regular income tax rate applicable for the taxpayer or the maximum rate for that type of capital gain income. For 2004, the maximum capital gain rates were 5%, 15%, 25%, and 28%.

The first step in computing the capital gains tax is to compute the amount of adjusted net capital gain. Adjusted net capital gain is capital gain without unrecaptured 1250 gain, gain on small business stock equal to the 1202 exclusion, and collectibles gain.

The next step is to figure out how much income a taxpayer with that filing status can have taxed below 25%. For 2004, this amount is $29,050 for single and married filing separate, $58,100 for married filing jointly or qualifying widow(er), and $38,900 for head of household. These amounts are limited to taxable income (including capital gains). For example, if a single taxpayer has taxable income of $20,000, then the amount the single taxpayer can have taxed below 25% is $20,000.

From the amount of income taxed below 25%, subtract the net capital gain income (remember net capital gain income is long-term gains over short-term losses). The result is the maximum amount of adjusted net capital gain that can be taxed at 5%. Any adjusted net capital gain that cannot be taxed at 5% is taxed at 15%.

Unrecaptured 1250 gain is taxed at 25%, or the regular marginal rate if it is lower.

Collectibles gain and 1202 gain exclusion is taxed at 28%.

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