Capital Gains Tax in the United States and Capital Gains Tax Exemptions

Capital Gains Tax in the United States and Capital Gains Tax Exemptions

Capital Gains in US

Capital gains tax, as opposed to ordinary income tax on the working-class, are used to refer taxes on incomes generated by capital investments and the United States of America has optedfor a preferential-rate so as to motivate entrepreneurs to borrow for investment purposes, as a tool to cater the needs to maintain the levels of economic activity as per the economy’s health. The time for which the amount is being borrowed and the tax-bracket decides the amount of tax.

The tax on short-term capital-gains, investments for a year or less, follows the ordinary rates of income-tax and the taxes on investments that exceed the duration of a year, categorized as the long-term capital gains are lower than the former category. Before 2003, the tax-rate was around 20 percent which was reduced, following a sunset provision, to 5 percent and 15 percent, respectively, for investors falling in the last and the second last income-tax-brackets which will be effective till 2010, extending the previously decided year of 2008, through the Tax Reconciliation Act, 2006.

The Tax Reconciliation Act, 2006

The Tax Reconciliation Act passed on May 17, 2006, with the help of President George W. Bush extended the expiry year of 2008 of the tax-rate of 15 percent on the long-term capital gains and qualified dividends up to 2010. The provisions of the act stated that those in the qualified dividends and the long-term capital gains’ tax bracket of 10 percent and 15 percent will pay no tax in the years 2008, 09 and 10, but after 2010, tax on dividends, regardless of the tax-bracket, will be according to the ordinary income-tax rate and the tax-rate for the long-term capital gains will resume to the pre-2003 level of 20 percent.

The qualified five-year 18 percent rate of capital gains, 8 percent for those in the tax-bracket of 15 percent, will be restored. Therefore, in the year 2011, which is not too far, the tax-brackets for the short-term capital gains will be five as opposed to six in the year 2003 and the tax-rate will increase to 15%, 28%, 31%, 36% and 39.6% as compared to the 2003 levels of 10%, 15%, 25%, 28%, 33% and 35%, respectively. Similarly, for the long-term capital gains, again, the tax-brackets are reduced as compared to 2003 to five from six in 2011and the rates will increase to 10%, 20%, 20%, 20% and 20% from 5%, 5%, 15%, 15%, 15% and 15%, respectively.


The 26 United States Code (USC) § 121exempts an individual a sum of $250,000 on his tax on capital gains from the sale of real estate if he has used it as a basic residence for two years from a total of five before selling it and if it is a couple the wife will receive the same exemption, so the total becomes $500,000. However, there are different provisions for different cases like partial-residence, disability, military-service, etc., etc. The same USC gives no benefit in case of loss and it can not be deducted from the sale.

The distance between the work-place and the home responsible for a change in living-place offers no exemption but the bankruptcy of your employer may help you getting the exemption ($250,000-$500,000) to settle at a new location. Many investors sell investments that lose in value at the year-end to patch-up the losses through gains in the tax exemption. Individuals can claim an exemption up to $3,000 an year and can claim the remaining amount next year, as well.

Similarly, the losses incurred by corporation are leveled by refunding some of the tax amount paid during the periods of gain. Deferral techniques and/or the methods of proper sale can help you reduce or defer capital gains tax. The 1031 exchange, structured sale, installment sale and charitable-trust, tax planning strategies, are permitted for individuals to save taxes.

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