This Year, Capitalize on your Capital Gains and Losses

Candidates Chatter About Capital Gains

The terms ‘capital gains’ and ‘capital losses’ are heard especially often during an election year, with many candidates debating and proposing different tax policies and plans. You may have heard these terms and wondered what they really meant. You may not have realized it, but it is likely that these capital gains and losses directly affect your personal taxes.

So what is all this talk about Capital Gains?

Did you know that almost everything you own and use for personal pleasure or investment purposes is considered a capital asset? When you sell one of these capital assets, the difference between the amount you initially paid for it and the amount you sell it for is called a ‘capital gain’ or a ‘capital loss.’ The proper reporting of these capital assets, and their gains and losses, on your federal income tax returns can save you a bundle of money, so there are several things you should know to properly report and take full advantage of your capital gains and losses.

So how do I report Capital Gains or Capital Losses?

Here are some things to remember in determining your Capital Gain or Capital Loss:

  • No Deduction for Personal-Use Property. You may deduct capital losses on investment property, but not on personal-use property.
  • Long Term versus Short Term. A capital asset held for more than a year is classified as long-term, while a capital asset held for less than a year is classified as short-term.
  • How to Calculate Capital Gain or Loss. To calculate the net capital gain on long-term assets (it is a capital gain if your long-term gains exceed your long-term losses), subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
  • Realizing your capital gains is vital to saving you money because tax rates that apply to the net capital gain are usually lower than those that apply to other income. For the 2011 tax year, the maximum capital gain rate for most people is 15%. For lower income individuals, the rate may even be 0%; however, special categories of net capital gain may be taxed at a rate of 25% or 28%.
  • Capital Losses Reduce Taxable Income. If your capital losses exceed capital gains you can deduct the excess to reduce other taxable income (such as wages) on your tax return–up to an annual limit of $3,000.00 ($1,500 if married filing separately).  If the total net capital loss exceeds this limit, the remaining deduction can be carried over to the next year.
  • Capital Gains and Losses Figured on Form 8949, and Schedule D of Form 1040.Use the form, Form 8949, Sales and and Other Dispositions of Capital Assets, to calculate capital gains and losses. You should use this form to list all capital gains and losses, and the subtotals from this form should be carried over to Schedule D (Form 1040), where gain or loss will be calculated.

For more information on reporting capital gains and losses, see Schedule D Instructions, Publication 550 (Investment Income and Expenses) or Publication 17 (Your Federal Income Tax). All forms available at www.irs.gov or by calling 800-TAX-FORM.