101 - Understanding Capital Gains Tax

101 - Understanding Capital Gains Tax

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0:00 So don't you just love when the IRS can make something that's super simple at least seemingly super simple and just Complicated like crazy. 0:08 So let's jump into the capital gains tax like on one end. It just seems like it's really basic So if you hear a capital gains tax Which is different than ordinary income tax rates, which we've covered in the past, but say you sold like you bought stock for A hundred dollars and you sold it for a thousand 0:27 dollars. That would be a capital gain It's something that you held an asset that you held went up in value and you sold it when you sell it. 0:34 That's when you realize the capital gain and that's when it becomes taxable and whether it's stock or, or it's a business or it's a rental property. 0:43 All of those have capital gains with them and the tax rates are different for those. So these are this. This is where it starts to get complex. 0:50 So these are just some of the high level things that you should know about capital gains tax. If you hold something, if you own it for less than a year, it's not technically a capital gain tax. 1:01 It's not taxed like a capital gain if you hold it less than a year. That's a short term. A short term capital gain is really just treated like your ordinary income and the tax rates are normally higher. 1:12 That's a, that's, that's like the regular tax brackets. That's if it's short term. If you hold it for more than a year though, that's when it's a long term. 1:20 Long term capital gain. So this just real quick. We're talking about long term. They'll put that up here. That is long term. 1:29 Okay, here, here are the tax brackets. Like you may have heard like, oh, a long term capital gain. It's a 15% tax rate. 1:37 And that's correct. It is a 15% tax rate. But as your other income changes, that could also change. And I'll give you an example of that here in just a second. 1:46 And right now, we're just going to talk about the federal taxes. We're not going to get into the state tax rate at all. 1:52 Okay, so sleep. As an example, let's say you make, we'll stick with $100,000. Example, you have $100,000. That's your gain. 2:00 We're not talking about sales price or anything. This is a gain and you sell it. What's the tax on that? 2:08 Just very simply put. You might think it might be this. It could be a 15%. So if you go, well, if we're just using that 15%, you'd have $15,000 of tax. 2:19 Here's where it gets a little complicated because your other income that you earn in a year, that will change. How much tax you're going to pay on a capital gain. 2:28 Kind of weird, right? So if you have, in this example, if you've got, if you're married, and you file a joint tax return, this, what this number right here, this $89,250 means, if you're taxable income is up to $89,250. 2:45 And anything up to that point, your, your capital gain can actually be tax free. And you would actually be using the 0% rate if it's less than $89,250. 2:56 So here's, here's the example. We'll continue this example. You, say you earned $50,000 on a W2, okay? So you got $50,000 on a W2. 3:09 So $50,000 W2. You have $100,000 again. That's what we're talking about. This is the capital gain. We're not, we're not even going to calculate the tax yet. 3:20 What's your total income right there? Your total income is $150,000. Right now we're ignoring personal deductions and standard deductions. We're just, we're just going to keep it simple. 3:31 We're just going to say this is your taxable income. If that's your taxable income, this first $50,000 right there, that will go towards this $90,000, the $89,000 that's tax-free. 3:45 So if we get some exact numbers, you take $89,250 minus $50,000, you have $39,250 remaining. So we're filling up this bucket. 3:57 We're filling up from $0,000 to $89,000. We just, we have to start with the W2 income. We just went up to $50,000. 4:05 Now we have $39,000 remaining. And what this means is $39,000 of this, $39,000 of that, $100,000. So $39,250. And then right there, we'll see what this is, $60,750. 4:30 That capital gain, I just wrote that out. That capital gain is taxed in two ways. Well, the first way is a 0% rate. 4:40 The second is a 15% rate. You just move through this tax bracket where you're considered tax-free. So part of it was tax-free. 4:48 And then when you get over that, it gets up to the 15% rate. So there's, there's the first step. But then look at this. 4:55 Now we have these other income levels. So now look at this. We'll delete that. The next step as your income goes, it's over $553,000. 5:08 That's when you're going to be taxed at 20%. So all your income, it would be like this same bucket here. 5:17 If we change this to a million. Oh, I haven't pre-done these estimates or anything yet, so we'll see how this goes. 5:27 But let's say you have a million of capital gain. Let's move all this up here. You are going to have, You're in those same brackets, the 0%. 5:40 That doesn't change. Even if you had a million of gain, that 15%, that's gonna change. Because between 89,000, the difference between these two, between 89,000 and 553, 850, that's where you're gonna be taxed at the, that's where you're gonna be taxed at the yeah, the, the 15%, and then above that 6:07 it goes up to 20%. So, let's see, 553, 850, minus, well, we have an 89250, 464, 600. I know, this is, yeah, this stuff is just insane. 6:31 I know, you're probably just like, what is going on? I'm sure, if you're just rolling your eyes at this crazy stuff, but it's good to know, like, if you're, if you're in a situation like this, and you want to know why there's different tax rates and stuff, you gotta, you gotta know. 6:45 Or you gotta know why you might be paying more in tax. So now let's go back. We have, remember, we have a million dollars a gain total, $4.64, $600, tax to 15%, $30,000. 6:56 $39,250 is taxed at zero, so the remaining $4,96,150 is taxed at 20%. That's how the gain is broken out. So you just do the math on each of those, that's how you get the total tax on it. 7:13 And that's why it's not a flat 15%. And I'm gonna just throw a wrench in the whole thing before I wrap up. 7:19 Not really a wrench, it's just the tax law. There's a 3.8% right here, a 3.8% net investment in cost. You know what, I'm, I gotta look that up real quick. 7:37 Because it's gonna be different when you're married, filing joint, or filing separate. So if you're married, filing joint, That's when it's, it kicks in at $250,000. 7:47 Married, filing separate, it's $125,000. If you're single, it's $200,000. So what that means, is as you're moving through these different income levels here, as it's going down, Once you get over the $250,000, filing a married return, you're still paying those, those rates that we talked about here. 8:07 Those rates don't change, but there's an extra tax, an extra 3.8% on a big portion of that, and a big portion of that. 8:18 Once you're over the $250,000 of taxable income. So you can see how pretty quickly you could be paying 23.8% federal tax on a lot of that gain, plus your state tax on that. 8:30 So that's the that's the capital gain calculation that that covers quite a bit of the capital gain the different implications of it shows you the different tiers, but hopefully that breaks it down. 8:41 If you're going through this, you need to calculate your capital gain.