If you haven't been paying attention, capital gains tax rates, which is what you pay on gains from the sale of stock (among other assets), are not the same as they were several years ago. They were reduced in 2003.
As of this writing, there are two main holding periods for capital assets. Assets held for a year or less are considered short-term. Those held for more than one year are considered long-term.
If you're in the 10% or 15% tax bracket:
- Assets held for a year or less are taxed at your ordinary income tax rate.
- Assets held for more than a year are taxed at a 5% rate.
If your tax bracket is greater than 15%:
- Assets held for a year or less are taxed at your ordinary income tax rate.
- Assets held for more than a year are taxed at a 15% rate.
The difference can be enormous. If you hold a security for 12 1/2 months and then sell, you'll likely pay just a 15% tax on the gains. If you sell after holding for only 11 1/2 months, though, you'll be taxed at your ordinary income rate, which can be as high as 35%. So you might pay more than twice as much in taxes.
There's more to learn. Take advantage of this nifty overview of current capital gains rates and how to make sense of them, courtesy of our tax expert, Roy Lewis.
Get the scoop on taxes from the horse's mouth -- the IRS website -- and also at the Fool's Tax Center area.
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