Capital Gains Tax Key Terms
Prepare yourself for the capital gains tax by knowing these key words
Selling a piece of property or stocks may net you some extra cash, but that money isn’t without strings. When you sell a high-priced asset like that, any money that you receive over what you paid for the item is subject to capital gains tax. This situation may put you in a different tax situation during tax season, so there are provisions in place to ease the capital gains tax burden. Familiarize yourself with some capital gains tax key terms to help you navigate that road.
Capital gains tax
The capital gains tax is the tax you owe the government on the money you receive from the sale of an asset such as a home or property that is more than what you paid for it originally. For example, if you paid $100,000 for a house 10 years ago and sell it for $150,000, then you pay taxes on that $50,000 you made from the sale.
Try: The Library of Economics and Liberty has a very detailed section on what the capital gains tax is and the history behind it.
Capital asset
The object that is the subject of the capital gains tax is the asset, or the capital asset. In addition to real estate and land, these could be things such as investments or the equipment in a manufacturing plant.
Try: wiseGEEK.com does a great job of breaking down the definition of a capital asset into everyday language.
Capital gains tax rate
The IRS regulates the amount or percentage of taxes you pay on the difference between the purchase price and the sale price of your asset. Generally speaking, the more money you receive from the sale, the higher the tax bracket you fit into and the more you have to pay. These percentages change occasionally, so it is wise to keep abreast of the current rates if you are planning a sale.
Try: If you want to know the current capital gains tax rates, go right to the source and check out IRS.gov.
Basis
Your basis is the price that you originally paid for the asset, which is sometimes adjusted for factors such as inflation.
Try: Fairmark.com talks about basis and how it fits into the whole equation of capital gains tax.
Carry back
Being able to carry back means that you can apply losses from one tax year to another to offset capital gains from prior years, canceling out any capital gains taxes you may have paid during that period.
Try: FindLaw has this article that gives up-to-date carry back options to consider during tax time.
Carry forward
The sibling of carry back, carry forward, is the exact opposite. This allows you to carry any losses you have to the following years to ease your tax burden of capital gains taxes during the current tax year.
Try: Investopedia not only gives you a clear definition of carry forward, but also provides links to related articles to help you broaden your understanding of other factors related to these tax issues.
Copyright © 2011 Business.com, Inc. All Rights Reserved.
