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Speaking Mathanese: Capital Gains Taxes

Welcome back to another edition of "Speaking Mathanese," our Motley Fool series that tackles financial math myths and deconstructs the computations that make the biggest difference to your bottom line.

This week, our quest to make you smarter than a fifth-grader finds us taking another crack at capital gains.

The myth
How did you do on our quiz? To review, last time I asked you to tell me what the capital gain would be had you bought 100 shares of each of these stocks and held them for exactly one year:

Company

Closing Price 6/26/06

Closing Price 6/26/07

Per-Share Dividends Pd.

Amazon (NASDAQ:AMZN)

$36.77

$67.48

$0.00

Boeing (NYSE:BA)

$83.89

$94.98

$1.30

Microsoft (NASDAQ:MSFT)

$22.82

$29.52

$0.39

Procter & Gamble (NYSE:PG)

$55.99

$61.19

$1.28

Volcom (NASDAQ:VLCM)

$28.51

$46.43

$0.00

Source: Yahoo! Finance

Ready for the answers? Drumroll, please:

Company

Capital Gain

Amazon

$3,071.00

Boeing

$1,109.00

Microsoft

$670.00

Procter & Gamble

$520.00

Volcom

$1,792.00

Did you include dividends? Believe it or not, you shouldn't have. Dividends are treated differently by the Feds.

The math
So that's it? Actually, no. The sole reason for understanding capital gains is so that you'll know what to pay when the IRS comes calling. Thus, we turn to our Foolish tax expert, Roy Lewis:

Since all of the shares were held for only one year, they are all SHORT-TERM gains. In order to be long term, they must be held for MORE than one year.

And what does that mean? Once again, here's Roy:

Long-term gains are taxed at a maximum of 15%. That tax rate could be lower, if you're in the lower brackets. Short-term gains are taxed at your marginal tax rate, whatever that is. It could be as high as 35% (the highest marginal bracket).

So, if you held Amazon for a year and sold as in the example above, you'd pay taxes on that $3,071 at your normal tax rate. Had you held for just one more day, you'd pay a maximum of 15%.

Or, in mathanese:

Tax = Capital gain  x  no more than .15 (for long-term gains)

Tax = Capital gain  x  your normal tax rate (for short-term gains)

Still have questions? Submit them here. And I'll see you next time for more about dividends, taxes, and the mathanese behind it all.

For more money ideas, get 30 days of free access to Motley Fool Green Light right now. There's no obligation to subscribe.

Amazon is a Stock Advisor selection, Microsoft is an Inside Value recommendation, and Volcom is a two-time Motley Fool Hidden Gems pick.

Fool contributor Tim Beyers writes weekly about personal finance and investing basics. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Find his portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is lobbying its local school district for a course in beginning mathanese.


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Tim Beyers
TMFMileHigh

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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Related Tickers

10/29/2014 3:59 PM
AMZN $294.12 Down -1.47 -0.50%
Amazon.com CAPS Rating: ***
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MSFT $46.62 Up +0.13 +0.28%
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VLCM.DL $0.00 Down +0.00 +0.00%
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