Capital Gain
March 7, 2009
A Capital Gains Tax (CGT) is a tax levied on the profit from a sale of a non-inventory asset that was bought at a lower price. Capital gains are usually collected from the sale of property, precious metals, bonds and stocks. All countries do not necessarily levy a capital gains tax and usually have different rates for taxing companies and individuals.
Equities are a form of popular liquid asset and state or national legislation will have varying financial obligations that need to be observed with regard to capital gains. Taxes are usually levied by the government based on the transaction, dividend and capital gain on the stock market figures. However, these obligations can differ from legal jurisdiction to jurisdiction since it is possible that tax has already been incorporated into the stock price due to the varying taxes paid by the companies to the state. Sometimes tax free stock market operations can be used to boost economic growth of the state.
Companies and individuals in the USA are charged Income Tax on the net total of their capital gains just as much as on other sources of income. However, tax rates for individuals are lower on the long term capital gains that comprise gains on assets that have been held for more than a year before being sold. The tax rate was reduced to 15% and 5% for individuals in the two lowest income tax brackets on long term gains in 2003. Short term capital gains tax is calculated at a higher rate like the ordinary income tax rate.
There is a lower 15% tax levied on eligible dividends and capital gains, which was to expire in 2008 but has been extended through 2010 by former President Bush under the Tax Increase Prevention and Reconciliation Act signed on 17 May 2006. These reduced taxes will revert to the taxes that were prevalent before 2003 which were calculated at 20%. As a matter of fact, President Obama’s budget declared on 25 February 2009, has called for the Capital Gains tax to revert to 20% even before 2011.
The Internal Revenue Services (IRS) allows the implementation of tax planning strategies like the Charitable Trust (CRT), Installment Sales, Private Annuity Trust, 1031 exchange and the Structured Sale (Ensured Installment Sale). Unlike many countries, the United States levies US taxes on its citizens’ income regardless of where they are residing. It is therefore difficult for US citizens to avail of benefits of personal tax havens. Even though there are certain offshore bank accounts that claim to be tax havens, US law makes it mandatory to declare income from these accounts. Failure to do so is tantamount to tax evasion.
Implementing correct sales methods and deferral techniques can ensure a reduction or deferral in capital gains for the seller. There are a number of sales methods and techniques which have their own drawbacks and benefits.
Tax Loss Harvesting: Tax losses realized can be carried forward indefinitely and can be applied to offset capital gains. New trading methodologies have been evolved to harvest tax losses all year round vis-à-vis the year end which is what most financial advisors recommend, by Discretionary Overlay managers. This is a key area to reduce the tax burden on wealthy investors.
Charitable Trust: To give equity to a charity to reduce or defer capital gains.
Installment Sale: Collect payments from buyers over a period of a long time in order to defer capital gains.
Deferred Sales Trust: Allows the deference of capital gains which is due to a seller over a period of time.
Structured Sale Annuity: This is the Ensured Installment Sale to reduce and defer capital gains safely and have a guaranteed income stream.
Comments
Got something to say?
Sign up to receive the latest breaking news!
