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Encyclopedia > Capital gains tax in the United States
Taxation in the United States

This article is part of the series:
Politics and government of
the United States
For all other forms of taxation, see tax Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        A capital gains... Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... Image File history File links US-GreatSeal-Obverse. ... Federal courts Supreme Court Circuit Courts of Appeal District Courts Elections Presidential elections Midterm elections Political Parties Democratic Republican Third parties State & Local government Governors Legislatures (List) State Courts Local Government Other countries Atlas  US Government Portal      Politics of the United States takes place in a framework of a presidential...


Federal taxation
History
Internal Revenue Service
Court  ·   Forms  ·   Code
Income tax  ·   Payroll tax
Alternative Minimum Tax
Estate tax  ·   Excise tax
Gift tax  ·   Corporate tax
Capital gains tax
State & local taxation
State income tax
Sales tax  ·   Use tax
Property tax
State tax levels
Federal tax reform
FairTax  ·   Flat tax
Tax protester arguments
Constitutional
Statutory  ·   Conspiracy

Part of the Taxation series
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In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on "long-term capital gains," which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets. In 2011 these reduced tax rates will "sunset," or revert to the rates in effect before 2003, which were generally 20%. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        The history of taxation in the United States began when it was composed of colonies ruled by the British Empire, French Empire, and Spanish Empire. ... Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        IRS redirects here. ... Seal of the United States Tax Court. ... Seal of the Internal Revenue Service Tax forms in the United States are used by taxpayers and tax-exempt organizations to report financial information to the Internal Revenue Service (IRS). ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        The federal government of the United States imposes a progressive tax on the taxable income of individuals, corporations, trusts, decedents estates, and certain bankruptcy estates. ... The Federal Insurance Contributions Act (FICA) tax, a kind of payroll tax, is a United States employment tax imposed in an equal amount on employees and employers to fund federal programs for retirees, the disabled, and children of deceased workers. ...        Alternative Minimum Tax (AMT) is a tax system that is part of the federal income tax system in the United States. ... This article is about Estate tax in the United States. ...        Look up Excise tax in the United States in Wiktionary, the free dictionary. ... Inheritance tax, also known in some countries outside the United States as a death duty and referred to as an estate tax within the U.S, is a form of tax levied upon the bequest that a person may make in their will to a living person or organisation. ...        Corporate tax in the United States is a tax on the taxable income of a C corporation or an entity taxed as a C corporation. ... Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... States with no state income tax are in red, states taxing only dividend and interest income are in yellow Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        State income tax is an income tax in the United States that is levied by each... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        A sales tax is a tax on consumption and is normally a certain percentage that is added onto the price of goods or services that are purchased. ... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        A use tax is a type of excise tax levied in the United States. ... Property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. ... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        State tax levels indicate both the tax burden and the services a state can afford to provide residents. ... Tax reform is the process of changing the way taxes are collected or managed by the government. ... Throughout this article, the unqualified term dollar and the $ symbol refer to the United States dollar. ... A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ... Tax protester arguments are a number of theories that deny that a person has a legal obligation to pay a tax for which the government has determined that person is liable. ... Tax protesters in the United States make a number of statutory arguments that the assessment of the income tax in the United States violates the statutes enacted by the United States Congress and signed into law by the President. ... Tax protester conspiracy arguments are arguments raised by tax protesters that assert that the imposition of the income tax in the United States is the result of some kind of illicit conspiracy. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links Flag_of_the_British_Virgin_Islands. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links Flag_of_Germany. ... Image File history File links Flag_of_Hong_Kong. ... Image File history File links Flag_of_India. ... Image File history File links Flag_of_Indonesia. ... Image File history File links Flag_of_the_Netherlands. ... Image File history File links Flag_of_New_Zealand. ... Image File history File links Flag_of_Peru. ... Image File history File links Flag_of_Ireland. ... Image File history File links Flag_of_Russia. ... Image File history File links Flag_of_Singapore. ... Image File history File links Flag_of_Tanzania. ... Image File history File links Flag_of_the_United_Kingdom. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links This is a lossless scalable vector image. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Comparison of tax rates around the world is a difficult and... This table lists OECD countries by total tax revenue as percentage of GDP (as of 2005). ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        An income tax is a tax levied on the financial income... A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ... Under the United States Internal Revenue Code, the type of income is defined by its character. ...


The reduced 15% tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. As a result:


In 2008, 2009, and 2010, the tax rate on eligible dividends and capital gains is 0% for those in the 10% and 15% income tax brackets.


After 2010, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.


After 2010, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).


After 2010, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.


Technically, a "cost basis" is used, rather than the simple purchase price, to determine the taxable amount of the gain. The cost basis is the original purchase price, adjusted for various things including additional improvements or investments, taxes paid on dividends, certain fees, and depreciation. Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years. ...


Exemptions from capital gains taxes (CGT) in the United States include:

  • An individual can exclude 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 do not have to be continuous. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. There are allowances and exceptions for military service, disability, partial residence and other reasons. See IRS Publication 523.
  • If an individual or corporation realizes 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, toward the end of each calendar year, there is a tendency for many investors to sell their investments that have lost value. For individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year. Any additional net capital loss can be "carried over" into the next year and again "netted out" against gains for that year. Corporations are permitted to "carry back" capital losses to off-set capital gains from prior years, thus earning a kind of retroactive refund of capital gains taxes.

The IRS allows for individuals to defer capital gains taxes with tax planning strategies such as the Structured sale (Ensured Installment Sale), charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange. A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income. ... A structured sale is a special type of installment sale pursuant to Internal Revenue Code Section 453. ... A charitable trust is a trust established for charitable purposes. ... A private annuity trust (PAT) enables the owner(s) of highly appreciated assets, such as real estate, a business, collectables or an investment portfolio, to be sold without incurring current taxation. ... It has been suggested that this article or section be merged with Internal Revenue Code section 1031. ...


The United States is unlike other countries in that its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. U.S. citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that advertise as tax havens, U.S. law requires reporting of income from those accounts and failure to do so constitutes tax evasion. A tax haven is a place where certain taxes are levied at a low rate or not at all. ... This article contrasts tax evasion, tax avoidance, tax resistance and tax mitigation. ...

Contents

History of Capital Gains Tax in the U.S.

From 1913 to 1921, capital gains were taxed at ordinary rates, initially up to a maximum rate of 7 percent.[1] In 1921 the Revenue Act of 1921 was introduced, allowing a tax rate of 12.5 percent gain for assets held at least two years.[1] From 1934 to 1941, taxpayers could exclude percentages of gains that varied with the holding period: 20, 40, 60, and 70 percent of gains were excluded on assets held 1, 2, 5, and 10 years, respectively.[1] Beginning in 1942, taxpayers could exclude 50 percent of capital gains on assets held at least six months or elect a 25 percent alternative tax rate if their ordinary tax rate exceeded 50 percent.[1] Capital gains tax rates were significantly increased in the 1969 and 1976 Tax Reform Acts.[1] In 1978, Congress reduced capital gains tax rates by eliminating the minimum tax on excluded gains and increasing the exclusion to 60 percent, thereby reducing the maximum rate to 28 percent.[1] The 1981 tax rate reductions further reduced capital gains rates to a maximum of 20 percent. The United States Revenue Act of 1921 was the first Republican stab at tax reduction following their landslide victory in the 1920 federal elections. ... The United States Tax Reform Act of 1969 established individual and corporate minimum taxes, established a new tax schedule for single taxpayers, and lowered the maximum rate on earned income from 70 percent to 50 percent. ... The Tax Reform Act of 1976 was passed by the United States Congress in September of 1976, and signed into law by President Gerald Ford on October 4, 1976, becoming public law 94-455. ...


The Tax Reform Act of 1986 repealed the exclusion of long-term gains, raising the maximum rate to 28 percent (33 percent for taxpayers subject to phaseouts).[1] When the top ordinary tax rates were increased by the 1990 and 1993 budget acts, an alternative tax rate of 28 percent was provided.[1] Effective tax rates exceeded 28 percent for many high-income taxpayers, however, because of interactions with other tax provisions.[1] The new lower rates for 18-month and five-year assets were adopted in 1997 with the Taxpayer Relief Act of 1997.[1] In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001, into law as part of a $1.35 trillion tax cut program. President Ronald Reagan signs the Tax Reform Act of 1986 on the South Lawn. ... The Taxpayer Relief Act of 1997 reduced several federal taxes in the United States. ... George Walker Bush (born July 6, 1946) is the forty-third and current President of the United States of America, originally inaugurated on January 20, 2001. ... The Economic Growth and Tax Relief Reconciliation Act of 2001 was a sweeping piece of tax legislation in the United States. ...


Deferring and/or Reducing

Capital gains tax can be deferred or reduced if a seller utilizes the proper sales method and/or deferral technique. There are many sales techniques and methods out there, each of which have their benefits and drawbacks. See some ways to defer and/or reduce capital gains tax below.

  • Deferred Sales Trust- Allows the seller of property to defer capital gains tax due at the time of sale over a period of time.
  • 1031 exchange - Defer tax by exchanging for "like kind" property. Pay capital gains when it is realized.
  • Structured sale annuity (aka Ensured Installment Sale) - Defer and reduce capital gains tax while gaining safety and a stream of guaranteed income.
  • Charitable trust - Defer and reduce capital gains by giving equity to a charity.
  • Installment Sale - Defer capital gains by taking payments from a buyer over a period of years. No protection from buyer default.
  • [Self Directed Installment Sale (SDIS) - Allows for the deferral of capital gains taxes while removing the risks from buyer default under a traditional installment sale.[2]
  • (historical) Private annuity trust - No longer a valid tax deferral tool.

It has been suggested that this article or section be merged with Internal Revenue Code section 1031. ... A structured sale is a special type of installment sale pursuant to Internal Revenue Code Section 453. ... A charitable trust is a trust established for charitable purposes. ... A private annuity trust (PAT) enables the owner(s) of highly appreciated assets, such as real estate, a business, collectables or an investment portfolio, to be sold without incurring current taxation. ...

Criticisms

Some critics call the capital gains tax a regressive tax when its rate is lower than income tax (as is the case in higher tax brackets in the US). They argue that there is no justification for a lower tax on earnings from capital gains than from interest or dividends or from any other kind of income.[3] Image File history File links Emblem-important. ... Shortcut: WP:-( Vandalism is indisputable bad-faith addition, deletion, or change to content, made in a deliberate attempt to compromise the integrity of the encyclopedia. ... Self-publishing is the publishing of books or other media by those who have written them. ... In historical scholarship, a primary source is a document, or other source of information that was created at or near the time being studied, by an authoritative source, usually one with direct personal knowledge of the events being described. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        A regressive tax is a tax imposed so that the tax...


Others criticize the capital gains tax simply because it is a tax. Members of the third-largest political party in America [4] hold that all taxes are immoral, since the forceful transfer of money from one person to another is morally equivalent to what a thief does. [5]


References

  1. ^ a b c d e f g h i j Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle (ed). Capital Gains Taxation entry from The Encyclopedia of Taxation and Tax PolicyProject. Retrieved on 2007-10-03.
  2. ^ http://www.nafep.com/sdis/self_directed_installment_sale.htm
  3. ^ http://www.huppi.com/kangaroo/L-capgainsspur.htm
  4. ^ http://www.lp.org/article_85.shtml
  5. ^ http://www.fff.org/freedom/fd0703b.asp

Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st century. ... is the 276th day of the year (277th in leap years) in the Gregorian calendar. ...

External links

  • The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed (1999), Brookings Institution Press.
  • Deloitte Tax Country Guides
  • IRS "Like Kind Exchanges Tax Tips"
  • Free Capital Gains Info

 
 

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