Capital Gains Tax – Detailed Guide and Simple Explanation

This is the basic basic guide you could hope to find on capital gains taxes. Capital gains taxes are incredibly important to understand on your way to extending your portfolio, improving returns, and minimizing your tax expenditure beyond income tax. Capital gains tax are often confused for dividends tax, but this common misconception is one of the many basic steps in this simple explanation guide. First, we go through what capital gains even are, and then continue on to how capital gains are taxed. Capital gains taxes also form one half of the two types of dividends taxes!

Capital Gains Explained – Investment Basics

Capital gains sounds like the best and most confusing financial term you could come up with. It has connotations of wall street and Gordon Gekko, villas in the Hamptons, and invetment portfolios worth millions. Let us take you on the journey of capital gains (and capital losses), and what you need to know about them. You may come in contact with capital gains taxes as part of the dividends you receive, from mutual funds, or from other forms of finances or investment strategies and portfolios.

Capital Gains Definition: What is Capital Gains Income?

By definition, a capital gain is when capital becomes more valuable. This capital is capital asset, and most typically in the form of stocks. Usually the capital gains or losses occur when selling an asset (such as stock in a company). A capital asset, i.e. the thing gaining in value, is also often called a security. Capital assets can occur in the form of stocks, funds, real estate investments, or any number of investment portfolios

• A capital asset which has increased in value since purchase

What are Examples of Capital Gains? How Capital Gains work

Let’s take the example of a real estate investment. You buy an apartment in New York for $300.000. It was in a particularly up-and-coming neighborhood, and now five years later it’s worth $400.000. At this point it is an unrealized capital gain of $100.000. If you decide to sell this apartment, and you get your asking price of $400.000, you will have made $100.000. This is your realized capital gain.

$400.000 – $300.000 = +$100.000 Capital

Now let’s say you decided to invest in a neighborhood which did not fare so well over the years. Suddenly your apartment did not increase in value to $400.000, but rather decreased in value to $250.000. Then you will have unrealized capital loss. If you decide to sell this apartment (perhaps to avoid further depreciation in value), you will have a realized capital loss of $50.000.

$250.000 – $300.000 = -$50.000 Capital

What Counts as Capital? Capital Asset Definition – Dividends, Stocks, Co

To understand what a capital gain really is, it is important to understand what things count as capital themselves, what is the thing gaining in value when we speak of capital gain. Looking at regulations, capital assets are defined as a piece of property which has significant value. That means a quilt given to you by your grandma for free, which you sell for $15, is not a capital gain. Still, capital assets are more far reaching than most people often think: it’s not just related to stocks, but it’s also relevant to dividends, mutual funds, and more. These are all types of capital assets:

• Property, e.g. real estate
• Jewelry, Collectibles, or Art
• Stocks
• Bonds
• Investment Properties

What is the Difference Between Realized Capital Gains and Unrealized Capital Gains? Paper Gains, Paper Losses

Capital gain is, as defined above, just an increase in the value of an asset. This increase in value can occur any time of course, and usually happens a tiny bit every day. A capital gain can therefore occur anytime, but if the asset’s owner were to never sell, then this increase in value would be irrelevant. This type of increase in value, where the owner does not sell, but if he were to sell, he would sell it for a higher price than he bought it, is called unrealized capital gain or paper gain. The increase in the assets value is not transferred to real in-pocket-money, and rather only occurs on paper. A realized capital gain is when the owner ‘cashes out’ and sells his assets for more money than purchased.

• Realized gain is when asset increases in value and is sold
• Unrealized gain (or paper gain) is when the asset is not sold, but would incur capital gain if sold

What Types of Capital Gains are There? Short-Term, Long-Term

Typically you differentiate between short-term and long-term capital gain or loss. As mentioned above, when you own capital it typically changes in value. If you hang on to this capital for less than a year before realizing your gain (i.e. before selling), it is a ‘short-term capital gain’. If, on the other hand, you have owned this capital for longer than a year when you sell it, it qualifies as a ‘long-term capital gain’. These distinctions are quite important because they decide how the profit you make from your investment is taxed.

• Short-term capital gain is when you sell after owning the capital for less than a year
• Long-term capital gain is when you sell after owning the capital for more than a year

How is the Value of Capital Calculated? Details, Explanation, Example

Some capital assets are more straightforward to calculate than other. For example, buying 10 stocks at 30$ a share is quite simple to calculate because the total value of the capital is at 10 x $30 = $300. Other capital assets are much more complex. Take for a example a property, where the land is worth $30.000, and the land owner also builds a dock with a boat. Now the total construction of the dock cost $50.000, and the boat cost $20.000, but the transport of the materials for the dock cost $8.000 and for the boat an extra $2.000. That means the current value of the items is at

$50.000 + $20.000 = $70.000

Yet, when looking at the value of capital such as this, all costs are factored in, which means that for example transportation costs would also be included, leading to a total capital value of

$70.000 + ($8.000 + $2.000) = $80.000

This example demonstrates that the value of capital is desided by all costs (including e.g. insurance costs) in the acquisiton of the asset. In the eyes of the IRS, these are also called capital expenses. By the way, if this scenario took place in Florida, there would be the addition of the documentary stamp tax (Florida’s version of the real estate transfer tax), one of the real estate purchase taxes, and the owner would have to pay the state of Florida property taxes.

What is a Capital Gain Tax? Rates, Long- and Short-Term, More

So we’ve gotten to the heart of what capital gains and losses are, how they are categorized and how to calculate them. Only thing left now is to understand how to tax them. This is probably easier than you imagine, but harder than it should be

Capital Gains Tax Definition: What is Capital Gains Tax?

Capital gains tax is a tax on the profit you make with investment in capital assets. If you buy stocks and sell them for more money than you bought them, you have made profit (i.e. capital gains), and this extra money that you are receiving is taxed. If you sell capital for more than you bought it, you will necessarily, by law, pay capital gains tax.

• Tax on investments which gained value, e.g. stocks that grew

Capital Gains Tax Example Calculation – How Capital Gains Tax Works, Formula

So, let’s say you are filing your taxes. For the past two years you have held some stock in a great company, but now are looking to buy a new car. You sell your stocks for $10.000 more than you bought them for. That means you have realized capital gains of $10.000. Because you held these for longer than a year, you will be taxed at the capital gains tax rate. Also, because you are not married and do not have a partner, you are filing single. For a single filing, below $40.000, there is a 0% tax rate. Great! So on this capital gain you will pay no taxes!

$10.000 x 0 = $0

Now, what if you held on to the same stocks for another year, and then decide to sell them. In this time they gained so much in value that you realize a capital gain of $60.000! Now you will be in a higher tax bracket, that means that you will have to pay some taxes. For capital gains tax rates (see the full details below), the second bracket starts at $40.000 in capital gains. That means you will have to pay 15% tax on the $20.000 which exceed $40.000

($40.000 x 0) + ($20.000 x .15) = $3.000

That means you will have to pay $3.000 in capital gains taxes from your $60.000 realized capital gain.

Are Short-Term Capital Gains Taxed Separately from Income? How Capital Gains Taxes Work

Although, it is important to distinguish taxes on capital gains and capital gains taxes. The capital gains tax only applies to long-term capital assets (i.e. owned for longer than a year), while short-term capital assets are taxed as if they were normal income, at the income tax rate like the salary you receive from work. Capital gains tax rates are lower than income tax rates!

• Short-term capital gains are taxed using income tax rate
• Long-term capital gains are taxed less with capital gains tax rate

When do you Have to Pay Capital Gains Tax?

This is a good question. If you hang on to good stock for 20 years you will continually be becoming more and more wealthy, yet are not paying taxes… right? Yes! You pay taxes on capital gain when this gain is realized. This is what’s called a ‘taxable event’. That means when the event (i.e. selling your capital) occurs, you pay taxes. If you never sell your capital, you won’t have to pay taxes on it! Your tax bill is never affected by unrealized capital gains or losses.

Do you have to Pay Tax on Capital Losses?

No! You do not have to pay taxes on capital losses, because you are not making any money. Quite the opposite, you can deduct capital losses from your tax bill. This is one of the most important ways to reduce your taxes. More on that below.

• You do not have to pay tax on capital losses
• You can deduct capital losses from your tax bill

Capital Gains Tax Rates – USA

The USA has a federal capital gains tax, but also many states have their own capital gains tax rates. That means you have multiple stops that your capital gains will be taxed at.

USA – Federal Capital Gains Tax Rates List, Brackets

For the federal level, your capital gains are taxed at the following rates if you are filing single

• 0% tax: <$40.000
• 15% tax: $40.001 – $441.450
• 20% tax: >$441.450

How much is Capital Gains Tax in New York? Rates, Brackets, List

The state of New York has no free-standing capital gains tax rate. Here, long-term and short-term capital gains are equally taxed using the state’s income tax rate. Just like New York property tax rates, the income tax rates are relatively high, but see for yourself. In New York capital gains are taxed at these rates:

• 4% tax: $0–$8.500
• 4,5% tax: $8.501–$11.700
• 5,25% tax: $11.701–$13.900
• 5,9% tax: $13.901–$21.400
• 6,33% tax: $21.401–$80.650
• 6,57% tax: $80.651–215.400
• 6,85% tax: $215.401–$1.077.550
• 8,82% tax: $1.077.551 +

How much is Capital Gains Tax in California? Rates, Brackets, List

Just like the state of New York, California also has no free-standing capital gains tax rate. Here, long-term and short-term capital gains are equally taxed using the state’s income tax rate. California income tax rates are also quite high, thanks its mega metropolises Los Angeles and San Francisco housing some of the biggest companies in the world. In California capital gains are taxed at these rates:

• 1% tax: $0-$8.809
• 2% tax: $8.809.00-$20.883.00
• 4% tax: $20.883-$32.960
• 6% tax: $32.960.00-$45.753
• 8% tax: $45.753-$57.824
• 9,30% tax: $57.824-$295.373
• 10,30% tax: $295.373-$354.445
• 11,30% tax: $354.445-$590.742
• 12,30% tax: $590.742-$1.000.000
• 13,30% tax: $1.000.000 +

How to Avoid Capital Gains Tax – Saving Money with Deductions

If you are receiving dividends, you probably want to pay as little as possible in taxes. Giving away money that you have invested and worked for seems harsh. Better to structure your taxes better and save money. Maybe not save money from your dividends taxes, but just give less away.

Best Trick for Real Estate: How do I Avoid Capital Gains Tax on Property?

You pay no federal taxes on qualified dividends when your total income is below $39.375! That means if your income is higher, suddenly you have to pay more taxes, and will end up with less money in your pocket in the end. In this case you could actually save money by just working less so as to avoid reaching the point where you have to pay the dividends or capital gains taxes. Remember: This only applies to the federal capital gains taxes.

• No capital gains tax when income is below $39.375

Looking for more ways to save on your tax bill, check out our top tips!

Real Estate Tax Deductions

Tax Deductions for Companies! Capital Expense Deductions

Important in the topic of capital gains, are the fact that acquiring capital assets is incentivized by the state. That means that if you are clever enough to form an LLC or an S corp, you can write off big purchases such as machinery, property, or other items which can count as capital assets. Remember though! Most expenses have to be written off over time, if you buy a car for your business, you cannot deduct the full price of your tax bill in one go.

• Capital expenses can be deducted from tax bill

How to Save Taxes with Capital Losses – What to do when Capital Loses Value

If your investment has lost value, it may hurt at first. This is normal though, and isn’t as bad as you first thought perhaps. This is because you can deduct capital losses from your tax bill. That means you pay less taxes because your investment did not turn out well! Only one catch, while you have to pay taxes on capital gains for all types of assets (e.g. even jewelry), you can only deduct capital losses when you bought your asset for investment purposes. For example stocks, property, etc. are all purely investment, and therefore can be deducted when losing in value.

• Deduct capital loss from tax bill
• Only possible for assets purchased for investment

How to Offset Capital Losses – Capital Gains Tax Explanation, Example

If you have made a significant capital gain in a year, but also capital losses (which, let’s be honest is quite common and to be expected), then you can write off the capital losses. For example, if you have made $200.000 in capital gains over some particularly lucrative stock, but have also made $100.000 in losses from a particularly poisonous investment, then you only need to pay taxes on the $100.000 of profit you made on the first. This is why it is called offsetting, because you offset some of the gain you make with the losses.

• Reduce your capital gain by the amount you lost through your capital losses

Tax Special! Income Tax

To learn about dividends tax means to learn about income tax as we’ve learned. That’s not a problem though because we have a simple guide for learning about income tax for the very beginners. It is a simple explanation of everything you need to know about paying income tax, how to tax income and everything in between. Income tax is something that will follow you forever, so it’s best to get to know it now and forever hold peace with it.

USA Income Tax

Tax Special! Dividends Tax

Dividends tax also utilize capital gains taxes! Although dividends also carry their whole own addition of complications and confusions. We’ve writtena nother helpful and simple guide to learn everything you need to know about dividends taxes, how they work, when they occur, and of course also how to save money on your dividends taxes. No doubt you’re going to learn something very important in this article.

Dividends taxes are taxes on the dividends which you receive as a shareholder in a company. What are dividends? In a sense they are like the company sharing part of their income with you, as a reward and incentive of being a shareholder in their company.

USA Dividends Tax

Tax Special! Property Tax

As mentioned, taxes on property are nearly as complicated as on income or capital. Property taxes, where they are taxed, what they tax, and how to pay less property taxes, can all be found in our all-encompassing guide on property taxes.

Property tax is often confused as being a tax on real estate property. Yet this is a misconception. The largest proportion of property taxes come from real estate, because this is the most expensive property most people own. Yet property taxes can also be levied on airplanes, computers, furniture, etc. In the U.S., each person pays an average of $1.617 in property taxes a year. The state which pays the most property taxes is New Hampshire with $3.307.

USA Property Taxes

Dividends Tax – Detailed Guide and Simple Explanation

This is the basic basic guide you could hope to find. We take you through dividends tax from the very beginning to the very end, covering everything you could hope to learn about this form of tax, from income tax or capital gains, tax deductions, and more. Although usually reserved for tax collectors and your accountant, it’s good to know exactly what this is, how much it is, and how to to reduce it. Even if you’re not having to pay dividends tax at the moment, it’s good to get read up on it in the meantime.

Dividends Explained – Investment Basics

So, dividends. That’s what’s being taxed, and to understand how this tax works, we first take a look at how dividends work. More specifically, what are dividends?

Dividend Definition: What is a Dividend

A dividend is by definition number that’s divided by another number. In the context of finances, a dividend is the pay-out of the company’s earnings to its shareholders. There are two basic ways for shareholders of a company to make money, either by selling their shares, or because the company grows and pays out dividends to its shareholders.

• A dividend is what a company pays out to its shareholders when it makes profit
• Like a reward for investing

What is a Dividend Example? How Dividends Work

Consider you decide to invest in a company, for example you invest 500 shares. This company does quite well and over the next quarter they earn heavily. They then decide to pay out dividends. Because they did so well, they decide to pay out $0,50 per share. You own 500 shares, and that means

500 x $0,50 = $250

You receive $250. You do not have to sell your shares, and nothing changes about your shareholding in the company, it is merely a thank you, or a form of reward for holding shares and the company making earnings.

What are the Types of Dividends?

There are 5 basic types of dividends. They are: cash dividends, stock dividends, property dividends, scrip dividendss, and liquidating dividends. In the example above, we are dealing with a cash dividend. These are the most popular and frequent types of dividends. Next, stock dividends. These are where a company rewards a shareholder not with cash, but rather with more stocks. That means that the shareholder did realize an increase in capital, but not in the form of money, but rather in the form of owning more of the company. A property dividend is when you receive an object or any form of property as a dividend (e.g. a new sports car). A scrip dividend can be imagined as an I O U, and is typically done when companies do not have enough liquid assets. A liquidating dividend is when the company is dissolved and shareholders receive their investment.

• Cash Dividend
• Stock Dividend
• Property Dividend
• Scrip Dividend
• Liquidating Dividend

What is a Qualified Dividend? Difference Ordinary, Qualified Dividends

Especially when considering dividends taxes it is important to consider whether a dividend is qualified or unqualified (called ordinary). An ordinary dividend is taxed much higher than a qualified dividend, because ordinary dividends are taxed as income, while qualified dividends are taxed at the capital gains tax rate. So what’s the structural difference between these two types of dividends? The company behind them is either qualified or not.

• Qualified dividends are taxed at a lower rate!

When can Dividends be Qualified? Types of Companies

Whether a company’s dividends can become qualified depends on the origin of the company (i.e. American or not), the type of stock (e.g. REITs are not qualified), and the holding period. That means that the dividends can only be taxed at the lower capital gains tax rate when these requirements are fulfilled.

• Companies must fulfill requirements to become qualified

What is a Dividend Tax? Rates, Qualification, More

Now we know that a dividend is really just a form of payment from a company in which you have invested. You receive payment because the company grows and you are a shareholder within the company. Now it also makes sense that this is being taxed. Since you are making money, it is in a sense a form of income. But it’s slightly more complicated than that

Dividends Tax Definition: What is Dividends Tax?

Dividends tax is the tax on income made in the form of dividends. This is quite self-explanatory. Dividends are always taxed and there is no way around it. Even if you immediately invest all your dividends back into the same company, you will have to pay taxes on the dividends paid out to you. Dividends taxes themselves don’t actually exist, as they are either income taxes or capital gains taxes. It just depends on whether you have qualified dividends (taxed as capital gains) or ordinary dividends (taxed as income).

• Can be taxed as income or as capital gains
• Depends on qualification of dividends

To our article on Capital Gains Taxes: Capital Gains Taxes USA

To our article on Income Taxes: Income Taxes USA

Dividends Tax Example Calculation – How Dividends Tax Works, Formula

As mentioned before, dividends taxes are either income tax or capital gains tax. Either way we will give an example here. Take an income of $8.000 in a year for a unqualified dividend. This falls under the first tax bracket (when filing as a single) in the income tax brackets. That means you will pay 4% tax on this.

$8.000 – ($8.000 x 0.04) = $7.680

That means in the end you receive $7.680, and $320 you give away as part of your dividends tax.

What is Dividends Tax Rate? Tax Brackets, Rates

Depending on the type of dividend you have, you will pay different dividend tax rates. In short, the government taxes dividends either as capital gains or as income. There are two types of dividends, qualified (taxed as capital gains) and unqualified (taxed as income, see below for more). Therefore the tax rate of dividends tax is either the tax rate for your income tax or capital gains tax.

• Dividends tax rate is the same as either capital gains or income tax rates!
• Depends on whether a dividend is qualified

For tax brackets for unqualified dividends check out our article on

Income Tax USA

How to Save Money on Dividends Tax – Deductions, Itemizing

If you are receiving dividends, you probably want to pay as little as possible in taxes. Giving away money that you have invested and worked for seems harsh. Better to structure your taxes better and save money. Maybe not save money from your dividends taxes, but just give less away.

Best Trick: Save Dividends Tax with Income

You pay no federal taxes on qualified dividends when your total income is below $39.375! That means if your income is higher, suddenly you have to pay more taxes, and will end up with less money in your pocket in the end. In this case you could actually save money by just working less so as to avoid reaching the point where you have to pay the dividends or capital gains taxes. Remember: This only applies to the federal capital gains taxes.

• No capital gains tax when income is below $39.375

Tax Deductions of Wealthy Families: Gifts!

Using what is called the annual gift tax exclusion, it is possible for wealthy families to keep money within the family instead of going to the state. The parents give their (adult) children very highly appreciated shares of stocks which pay dividends. This way, the unrealized gain is passed on, without triggering the deferred taxes! This works because the children will most likely not be as high earners, and therefore the dividends will be tax free under the capital gains tax.

• Pass on appreciated dividends-paying stocks to children whose income is not too high

Use Capital Gains Tax Tricks!

Capital gains taxes are possibly the most lucrative for tax deductions and reducing your tax bill at the end of the year. There are many ways in which you can use dividends taxes on qualified dividends to reduce your tax bill, because they are capital gains taxes!

• Capital Gains Taxes USA

Transform into Real Estate!

Everyone knows real estate is a lucrative business, even more so thanks to the countless tax incentives. So maybe instead using dividends for income, it is better to transform them into real estate property using a real estate LLC. Read more about real estate tax tricks:

• Real Estate Tax Deductions

Tax Special! Income Tax

To learn about dividends tax means to learn about income tax as we’ve learned. That’s not a problem though because we have a simple guide for learning about income tax for the very beginners. It is a simple explanation of everything you need to know about paying income tax, how to tax income and everything in between. Income tax is something that will follow you forever, so it’s best to get to know it now and forever hold peace with it.

Income Tax USA

Tax Special! Capital Gains Tax

Capital gains tax is one of the two sisters of dividends taxes. It is a vital tax to know if you want to invest, and plan on increasing value of capital. Capital gains taxes are among the most important for the welathy, and for good reason. Knowing how to use these to your advantage is critical for multiplying your wealth.

Capital gains tax is a tax on the profit you make with investment in capital assets. If you buy stocks and sell them for more money than you bought them, you have made profit (i.e. capital gains), and this extra money that you are receiving is taxed. If you sell capital for more than you bought it, you will necessarily, by law, pay capital gains tax. Although, it is important to distinguish taxes on capital gains and capital gains taxes. The capital gains tax only applies to long-term capital assets (i.e. owned for longer than a year), while short-term capital assets are taxed as if they were normal income, at the income tax rate like the salary you receive from work. Capital gains tax rates are lower than income tax rates!

USA Capital Gains Taxes

Tax Special! Property Tax

As mentioned, taxes on property are nearly as complicated as on income or capital. Property taxes, where they are taxed, what they tax, and how to pay less property taxes, can all be found in our all-encompassing guide on property taxes.

Property tax is often confused as being a tax on real estate property. Yet this is a misconception. The largest proportion of property taxes come from real estate, because this is the most expensive property most people own. Yet property taxes can also be levied on airplanes, computers, furniture, etc. In the U.S., each person pays an average of $1.617 in property taxes a year. The state which pays the most property taxes is New Hampshire with $3.307.

USA Property Taxes

Income Tax – Explanation and Guide to Tax

Income tax can be confusing. What is it, why is it divided so confusingly, how much do I have to pay? Are all things that only make sense once you’ve taken a look behind the curtain to understand what your tax calculator is actually telling you. We’ve compiled this simple guide which helps you learn everything you need about your income tax. Income tax is probably the most important tax, as you pay it when you file capital gains taxes and dividends taxes as well!

Income Tax – Definition and Basics

Income tax means that people or corporations have to pay a certain amount of money to the government based on how much money they make. In other words, income tax is levied on individuals and corporations in return for generating income. This is a form of payment for the government in return for doing business within the jurisdiction, and are typically used to fund public services such as cleaning or education and to pay for goods or welfare which the government offers its citizens.

• Tax on individuals and corporations for generating income

How can I Calculate my Income Tax? USA Calculation, Simple Explanation

To calculate your income tax, you first need to find out what your taxable income is. This can differ from your actual income if you have used tax deductions, or paid advance taxes. Once you know what your taxable income is, you must find out the income tax bracket which you belong to. Once you know this, you must calculate that you will pay a part of your income in the first, second, third, etc. tax bracket. If you earn between $86.376 and $164.925, you will pay the firsts $9.950 in the first tax bracket (10%), the next $40.525 in the second tax bracket (12%), etc. until you have counted your whole income.

1. Find out what your taxable income is
2. Find your tax rate via the tax bracket
3. Add up different tax rates until your income is counted fully

Important here are two things, the tax bracket which you belong to, and whether you are filing alone, with a partner, or as head of household. Next, you multiply the tax rate (i.e. the percentage divided by 100) by your total income. Repeat this for the various jurisdictions for which you have to pay income tax (local/municipal, state, federal)

• Single
• Jointly
• Head of household

Explanation – What is an Example of Income Tax?

Let’s take Jane, who works as a secretary for a big company in New York. She makes $50.000 a year, in other words, her income is $50.000. In New York State, there are the following tax brackets:

The income tax rate for a single person generating $50.000 of income is 6,33%. Yet, she pays 4% income tax on the first $8.500, 4.5% on the next $11.700, etc. To find out how much Jane has to pay, she will have to pay

• $8.500 x 0.0400 = 340
• $11.700 x 0.0450 = 526.5
• $13.900 x 0.0525 = 729,75

At this point Jane will have taxed $34.100, and on the remaining $15.900 she will pay the tax rate of 5,9%

$1.596,25 + ($15.900 x 0,059) = $2.534,35

That means Jane has to pay $2.534,34 to the state of New York. Don’t forget though! New York city also has an income tax, and the federal government also has one. For each of these jurisdictions there is a tax rate which Jane will multiply by her salary to find out how much she has to pay.

What Counts as Income Tax? Types of Taxes using Income

Income tax forms part of multiple forms of taxes. For example, if you buy investment capital, this will typically be taxed under capital gains taxes, but if you have held the capital (e.g. stocks) for less than a year, you do not pay capital gains taxes, but rather income taxes on it. Another example is the dividends tax, where you pay capital gains taxes on dividends, unless they are qualified, at which point you pay the normal income tax rates! Types of taxes to use income tax therefore are

• Capital Gains Taxes
• Dividends Taxes

Which IRS Form to use for Income Tax – 1040, 1040A, or 1040EZ

There are three forms to use when filing income taxes. These are the forms 1040, 1040A, and 1040EZ. They are all relevant to income tax, and therefore all apply to all people. You only need to use one though, and must decide which.

The Different Income Tax Forms – Who can use the 1040EZ?

The 1040EZ can be used by everyone who is filing single (or married and filing jointly) and who has an income below $100.000. It is called the EZ because it is simpler than the other forms. With it you do not file for any tax deductions or itemizations.

What is the Difference between Form 1040 and Form 1040-SR?

When paying income tax, the difference between forms 1040 and 1040-SR is that they look different. The additional items, things you file, etc. are all the same, just that the 1040-SR has a different color scheme. It also includes the standard deduction table. The 1040-SR is typically better for people over the age of 65 or with eyesight issues.

Income Tax Structure – Do Rich People Pay more Taxes?

The structure of taxes are often more complicated than imagined, when you really look at it closely. For one, because they differ across regions, and another is that there are so many jurisdictions and small rules to adhere to. Nonetheless, if you want to know the basics of income taxes, this should tell you what you need to know. THis does not differ for e.g. capital gains taxes, where a similar marginal system is applied.

Who Pays more Taxes, Rich or Poor?

In one word, the answer is: the rich. Consider for a moment Jane, who makes $50.000 a year, and compare her to her boss Martin, who makes $200.000 a year. If both of these individuals pay the same tax rate (6.33%), Jane must pay $3.165 in income tax, and Martin has to pay $12.660. Because he makes more money, he has to pay more income tax. On top of that though, the more money you make, the higher the tax rate will be. This relates to tax brackets, and Martin, who makes $200.000, will be in a higher tax bracket than Jane.

Is it Fair that Rich People Pay More Taxes?

At first it may seem unfair that rich people pay more taxes than others. Yet, this is generally accepted because those making more income generally have less troubles financing their lives, while those who are very poor already can often not afford to pay for basic necessities. Therefore, if a Josh, who has troubles paying the electricity bill pays less taxes than a Martin, who just bought himself a new lamborghini, it is generally accepted as fair.

Tax Brackets Meaning and Explanation – What is an Income Tax Bracket?

If you’re looking at taxes it’s impossible to get around this topic. A tax bracket is necessary when different levels of income pay different rates of income tax. This means that a Jane, who makes $50.000 pays a different rate (i.e. percentage) of tax than a Martin making $200.000 and even a Josh who makes $13.000. On top of this, it will matter whether a person is married, and both individuals are filing their taxes together, or whether they are filing them as separate individuals.

Is Tax Bracket the same as Marginal Tax Rate? What is Marginal Tax Rate and Why is it Important

Tax brackets and marginal tax rates are not the same, but related. A tax bracket is when tax rates are divided based on income. A marginal tax rate is the amount of tax you pay for every dollar increase in your income. Therefore, marginal tax rates are always present in a system using tax brackets, and almost always when you have a marginal tax rate, this will be based on dividing earners into tax brackets based on the amount of their income.

Marginal tax rates are important first and foremost because, like tax brackets, they ensure that those unable to contribute more financially (i.e. low-income households) can keep more of the money which they need desperately, while moving this financial load on to people who usually would not struggle with earning slightly less. Marginal tax rates specifically are useful to define exactly how much tax you are paying because of a higher income. This can be important in e.g. promotion negotiations.

Example – New York City Tax Brackets

What are the different income sales tax rates in New York? Take a look below, with the list telling you the income range and what a single person would have as an income tax rate:

• $0 – $12.000: 3.078%
• $12.001 – $25.000: 3.762%
• $25.001 – $50.000: 3.819%
• $50.000 + : 3.876%

Interested in New York Taxes? Take a look at our article

New York Property Tax

What are the Three Types of Tax? Tax Structure, Progressive Taxing, etc.

It is generally accepted that there are three broad types of taxes. This does not mean there are only three forms, but rather that there are three ways in which taxes can be structured. The three types are progressive, proportional, and regressive.

1. Progressive
2. Proportional
3. Regressive

Progressive Tax Rate – Rich People pay more Taxes

A progressive tax is when people who are poorer have a lower tax rate, than those who are richer. In other words, the tax rate progresses with increasing income. In most states, income tax is done this way, meaning that the rich pay a higher percentage of their income.

• Progressive – More income = higher tax rate

Proportional Tax Rate – Everyone Pays the Same

Next, the proportional tax rate is when, no matter how much money you make, you pay the same tax rate. In other words, no matter who you are you pay a certain proportion of your taxes. Here, no matter whether you make $10.000.000 or $10.000 a year, you will pay e.g. 6% on income tax.

• Proportional – Same tax rate for everyone

Regressive Tax Rate Explanation – How do Regressive Taxes Work?

Lastly, the regressive tax rate, where those making less money have to pay the same taxes as someone with high income. For example a person buying a car, and they have to pay 10% sales tax. For a person with a very low income, this is proportionately much higher than for someone with a very high income

• Regressive – lower income = paying more taxes

What are Income Tax Rates in USA? How Much to Pay in Marginal Tax

Every State has their individual income tax rates (except for those who do not have income taxes, see below). At the same time there is a federal income tax rate. Therefore, it is important to keep all in mind when thinking about your income tax payments. So, without further ado, below the breakdown of all income tax rates you could need. Below are the tax brackets for USA federal income tax. First these are for single filers, then for married couples filing jointly. Note the calculation above, which means that the income tax rate corresponding to your bracket cannot simply be multiplied by your income.

USA Federal Income Tax Rates – How Much Income Tax do I Have to Pay? Single

Easily explained – This is what you have to pay in income tax at one glance. These are how much to pay in your marginal tax rate. For singles, the amount you have to pay corresponding to your income is as follows: If you earn

• < $9,875 – 10% of taxable income
• < $40,125 – $987.50 and 12% of income >$9,875
• < $85,525 – $4,617.50 and 22% of income >$40,125
• < $163,300 – $14,605.50 and 24% of income > $85,525
• < $207,350 – $33,271.50 and 32% of income > $163,300
• < $518,400 – $47,367.50 and 35% of income > $207,350
• > $518,401 – $156,235 and 37% of income > $518,400

USA Federal Income Tax Rates – How Much Income Tax do I Have to Pay? Filing Jointly

Easily explained – This is what you have to pay in income tax at one glance. These are how much to pay in your marginal tax rate. Filing jointly, the amount you have to pay corresponding to your income is as follows: If you earn

• < $19,750 – 10% of taxable income
• < $80,250 – $1,975 and 12% of income > $19,750
• < $171,050 – $9,235 and 22% of income > $80,250
• < $326,600 – $29,211 and 24% of income > $171,050
• < $414,700 – $66,543 and 32% of income > $326,600
• < $622,050 – $94,735 and 35% of income > $414,700
• > $622,051 – $167,307.50 and 37% of income > $622,050

Tax Special! Capital Gains Tax

Capital gains tax is one of the two sisters of dividends taxes. It is a vital tax to know if you want to invest, and plan on increasing value of capital. Capital gains taxes are among the most important for the welathy, and for good reason. Knowing how to use these to your advantage is critical for multiplying your wealth.

Capital gains tax is a tax on the profit you make with investment in capital assets. If you buy stocks and sell them for more money than you bought them, you have made profit (i.e. capital gains), and this extra money that you are receiving is taxed. If you sell capital for more than you bought it, you will necessarily, by law, pay capital gains tax. Although, it is important to distinguish taxes on capital gains and capital gains taxes. The capital gains tax only applies to long-term capital assets (i.e. owned for longer than a year), while short-term capital assets are taxed as if they were normal income, at the income tax rate like the salary you receive from work. Capital gains tax rates are lower than income tax rates!

USA Capital Gains Taxes

Tax Special! Dividends Tax

Dividends tax also utilize capital gains taxes! Although dividends also carry their whole own addition of complications and confusions. We’ve written another helpful and simple guide to learn everything you need to know about dividends taxes, how they work, when they occur, and of course also how to save money on your dividends taxes. No doubt you’re going to learn something very important in this article.

Dividends taxes are taxes on the dividends which you receive as a shareholder in a company. What are dividends? In a sense they are like the company sharing part of their income with you, as a reward and incentive of being a shareholder in their company.

USA Dividends Tax

Tax Special! Property Tax

As mentioned, taxes on property are nearly as complicated as on income or capital. Property taxes, where they are taxed, what they tax, and how to pay less property taxes, can all be found in our all-encompassing guide on property taxes.

Property tax is often confused as being a tax on real estate property. Yet this is a misconception. The largest proportion of property taxes come from real estate, because this is the most expensive property most people own. Yet property taxes can also be levied on airplanes, computers, furniture, etc. In the U.S., each person pays an average of $1.617 in property taxes a year. The state which pays the most property taxes is New Hampshire with $3.307.

USA Property Taxes

General Partnership: Formation, Advantages and Disadvantages

Many people want to go into business with a partner. This has many advantages over working alone. You have someone to carry you through struggles, and someone to turn to for decision-making. There’s also the fact though that you have someone who is interfering with the decisions that you would like to make. This can be hard to handle, but can be worth it. In the following we show you what a general partnership is, its advantages, how it is formed, and much more.

Definition and Basics: What does a General Partnership Mean?

The official definition, according to the state of California is “a form of business entity in which two or more co-owners engage in business for profit”. In practice it means two individuals share liability, profits, and losses from real estate investments. Important: this form of doing business is unincorporated, meaning that it is not separate from the people doing the business. It also has, by definition, more than one owner.

• A form of business entity in which two or more co-owners engage in business for profit

Forming a General Partnership: Business Name, Licenses, Agreements, etc.

In forming a general partnership, the first step is to choose a business name for the partnership. This is important, as you need to make sure that the name is not taken by another company or partnership. To do this you search your local district’s registry, the state secretary’s and so it does not infringe on a trademark or service mark the United States Patent and Trademark Office and the Register of Trademarks and Service Marks. Next, you draft and sign a well-written partnership agreement.

Next, back to the secretary of state, where you file a statement of general partnership. Many people skip this, as it is not obligatory, and you can avoid the $70 filing fee and the $15 fee. In the same step, you register the name of the partnership at the local level by obtaining a fictitious business name. Next you must set up a separate bank account for your partnership. You should try to keep your personal finances separate from your business finances. Finally you obtain the local business licenses and specialty real estate licenses (these differ between states).

Process summarized:

1. Choose a Name
2. Create a Partnership Agreement
3. File Statement of General Partnership and Register Name
4. Open a Partnership Account
5. Obtain Permits and Licenses

Documents:

• Partnership Agreement
• Statement of General Partnership

Advantages: Filing Fees, Stress and Flexibility

The first advantage is not the most significant, but perhaps important for partnershiips with limited time and finances (we do not recommend this). A general partnership is not as legally binding as other forms of business entities, and therefore is not necessary to be filed at the state level. Therefore you can skip the filing fee and hassle with the secretary of state. It is also in general a less stressful form of business, as there is less bureaucracy and it is less legally protected. Lastly, the biggest advantage of a general partnership is that it is very easy to convert to an LLC. This makes it a great stepping stone for those not ready for the total commitment of an LLC.

• No filing fee
• Less stressful
• Flexible to convert

Disadvantages: Structure, Liability and Disagreements

The main reason most people form a business is to avoid liability. This is unfortunately not the case for general partnerships which are not subject to liability protection, as they are not entities separate from their owners. An additional problem comes from the fact that general partnerships are often formed between two individuals who already know each other. Even when this is not the case, a common problem, as there are only two people in the partnership, is that owners disagree. This can lead to conflict and far-reaching issues. The lack of structure is another and the final disadvantage of general partnerships

• No liability protection
• Owners can disagree
• Lack of Structure

Real Estate General Partnership: Advice, Tips for Real Estate Partnerships

Different from other types of ownerships like C corporations or S corporations, a general partnership is considered the original partnership, and is also the least complicated. There are still a few details to keep in mind. Including how to structure a real estate partnership (whether limited or general), and the utmost importance of a partnership agreement. Lastly, we also answer the common question, if general partners are a necessary part of a partnership.

1. Structuring a Real Estate Partnership
2. Partnership Agreement
3. Does every partnership need a general partner?

Structuring a Real Estate Partnership

The structure of a real estate partnership can be a complicated thing. It is important to take your time with planning this, and making every step of it as perfect as possible. To avoid mistakes, get a primer on how to structure your partnership with the video below.

Partnership Agreement – Most Important Part of a General Partnership

When investors in a general partenrship buy a property, each general partner has an equal right to participate in the management and control of it. From a practical perspective, this means that determining how disagreements that arise in the ordinary course of business will be handled is of paramount importance. The partnership is free to designate a different method of decision-making and provide for it in writing either in the partnership agreement and/or an amendment thereto. In the partnership you will detail how decisions are made, how votes are made, and if you need e.g. a majority or unanimous vote.

The partnership agreement is make or break!

Does Every Partnership Need a Partner?

Yes. Every partnership, including limited partnerships, and limited liability partnerships (not to be confused with limited liability company), need at least one general partner. This is the person that makes day-to-day decisions, and takes the brunt of liability. They also make all legally binding decisions, as it is them who are liable for any legal consequences.

• Yes, every partnership needs at least one general partner who makes day-to-day decisions

Taxes: Pass-Through Structure

There are a few benefits to taxes in tthe world of general partnerships. Firstly, general partnerships, unlike corporations, do not pay income taxes. We go in-depth on the details you need to know, below.

1. Are Partnerships Tax Exempt?
2. Do all Partners pay the Same Amount of Taxes?

Are Partnerships Tax Exempt? Tax Structure of General Partnerships

Yes. General partnerships are tax exempt. The business itself does not pay any income taxes. Rather, the general partners pay income taxes. In other words, profits, losses, etc. all pass through to the partners directly.

• No, all income and losses pass through directly to partners and are taxed as their incoome tax

Distribution – Do all Partners Pay the Same Amount of Taxes?

This can be decided by partners. Otherwise, the IRS taxes every partner equally. This can be advantageous, e.g. if you are an existing partner and a new partner joins, in which case the amount of tax reduces. If you are made a partner though, then you become owner of the partnership’s assets, and also liable for taxes.

• Partners decide whether everyone pays the same amount

General Partnership – The Original Partnership

The general partnership is the classic, the original type of partnership. It is attractive often mostly for beginners or those who are not yet certain that they will enter an LLC or the direction their business will take. It has many advantages though, and is a good decision for many who choose it.

Comparison: What is the Difference between a General Partnership and Limited Partnership

The difference between a general partnership and a limited partnership is that a general partnership consists only of general partners, all of whom carry liability. Limited partnership has additional partners who are not liable (so-called limited partners). General partnerships and limited partnerships are often misconstrued, due to the important difference between a partner and partnership. A limited partnership also has general partners.

• Limited partnerships are general partnerships with additional partners who do not carry liability (limited partners)
• General partnerships consist only of general partners

See Limited Partnerships – Real Estate

REIT: Formation, Advantages and Disadvantages

For a more grand style of investment. It is possible to have a trust which manages real estate investments, in which many shareholders invest much capital. These are the wall street version of a real estate holding, and are connected with massive sums of capital.

Definition and Basics: Real Estate Trust Fund

A REIT is first and foremost a Real-Estate-Investment-Trust. At first glance, a REIT seems very similar to a real estate corporation. It is a company which operates or owns real estate. These are typically income-producing, such as hotels, infrastructure, or warehouse. That means the majority of its economy comes from income, as opposed to in the form of sales or appreciation. REITs are also usually not diversified. A REIT which specializes in timber, will own much land, but very little e.g. office spaces.

• Real Estate Investment Trust – Publicly traded companies

Forming a REIT: Big Real Estate Company

If you wanto to form a REIT you must first establish a partnership agreement. Typically REITs are originally management companies, thanks to the requirement of 100 investors. Next you decide in which state you will form your REIT, and contact this state’s secretary. Next, the private placement memorandum (also called offering memorandum) details important information about the REIT, e.g. properties which it intends to invest in, and information about board directors. Now you start searching for investors, by offering your prospectus which informs them of your strategies, structure, etc. Once the magic number of 100 is reached, you can filed for articles of incorproation. Finally, you file Form 1120 with the IRS, and you’re done!

Process summarized:

1. Establish partnership agreement
2. Decide on location
3. Contact secretary of state
4. Write a private placement memorandum
5. Investor search using prospectus
6. File for articles of incorporation and Form 1120

Documents:

• Private Placement Memorandum (a.k.a. Offering Memorandum)
• Prospectus
• Form 1120

Advantages: Low Risk, Diversification and Flexibility

Investors can profit from investments which they would usually not be capable of making. These can be massive infrastructure projects which an everyday person typically does not have the money to invest in, but in cooperation with many others can contribute. Additionally, they are able to diversify their investment within the real estate market, because they hold an interest in multiple properties with minimal dollars. There is also lower risk associated with REIT investing. Another certain advantage is the fact that investors can sell their shares quickly. Another advantage, if you are a foreign national in the USA, is that, although you would not qualify to invest in traditional real estate, you can through a REIT.

• Profit from investments which would otherwise be impossible
• Diversified investments
• Lower risk
• Sell shares quickly
• Not barred if foreign

Disadvantages: Slow, Taxation and Loss of Control

Some disadvantages were mentioned earlier. The main disadvantage is that REITs are typically not subject to large growth because they cannot reinvest their income. They are forced to return 90% of the earnings to the investors meaning only 10% of the earnings can be reinvested in the company. Additionally, while most dividends are only taxed at 15%, REIT dividends are taxed as regular income. This is a much higher rate. There is also the drawback that REIT investors do not have control over operational decisions, meaning they can be helpless against ineffective changes. Lastly, some REITs (but not all, do your research!) incur exorbitant management and transaction fees. This logically leads to lower distributions of incomme to shareholders, and therefore reduced income for the investors.

• Slow growth
• Dividends highly taxed
• No control over operational decisions
• High management & transaction fees

Real Estate REIT: Requirements, Profit

If you want to get in on the REIT business, there’s a few things to keep in mind. If you own property, or want to buy and sell properties, a REIT will not be for you. It is a more likely choice when you have surplus capital which you want to invest in a slow-growing and safe trust.

Are REITs Publicly Traded?

Yes! This makes the fundamental difference between other LLCs or e.g. limited partnerships. They are publicly traded, and therefore you can invest in REITs as you would in other trusts or stocks. In a sense they are stocks where you invest in real estate managers.

• Yes, REITs are publicly traded

Can I Start my own REIT? Requirements

Yes! Although it is not easy. There are a few important things to keep in mind. First, before becoming a REIT, most companies are LLCs, which once finding enough investors, file to become a REIT. These requirements are not asked to be present in the first year of a REITs operation, but usually by the second.

• REITs have multiple requirements
• Most REITs begin as LLCs

How Many Investors in a REIT?

The first important requirement is that you must have at least 100 investors. For most people it is difficult to find this. Especially when having little real estate experience, it is hard to find this many investors willing to take the risk.

• At least 100

Pay-Out for REITs – Over 90% of Profit

REITs must, by law, be structured such that at least 90% of profits must be distributed to investors as dividends, every single year. This is a law, and therefore, once not doing this, a REIT will forfeit its status as such and no longer qualify for the additional benefits of being a REIT.

• REITs must distribute at least 90% of profits to investors

What does a REIT Invest in?

Another law from the IRS: you must also invest at least 75 percent of a REITs value/assets in a form of real estate. This is usually not a problem, with the majority of REITs having over 90% of their assets invested in real estate. A REIT must also derive at least 95 percent of its gross income from real estate investments.

• REITs must invest at least 75% of their assets in real estate

Can you Become Rich with REITs? – Profit, Investment Dividends

Most people will not become rich with REITs. They are slow to throw dividends, yet for that reason usually very safe. It is unlikely to e.g. double your investment. Yet, in the long run, the vast majority of REITs have outperformed most stocks, meaning that they are a safer investment. Although there are some mega-REITs which have shown massive increases in value, and great profit for their investors, these are not get-rich-quick stocks.

• REITs are a safe but slow-growing investment

Invest in Real Estate or REITs? How to Choose

If you’re struggling to decide whether to invest in a REIT or in real life real estate? Take a look below, as this video explains everything you need to know about REITs and real estate:

Can an LLC be a REIT? Differences and Similarities

First and foremost, REITs are taxed as corporations. In practice, this means that most management companies intending to become a REIT will begin their life as an LLC. Once this LLC has grown to be large enough, it will file to become a REIT.

Taxes: Few Advantages

If you want tax deductions, REITs probably won’t be for you. Compared with traditional real estate investing, where tax write-offs are near-infinite, including depreciation, mortgage, interest, etc., REITs are not as priveliged.

1. REIT dividends Taxation
2. Depreciation Expenses

Normal Income – REIT Dividends

At least 90% of income which the REIT generates must be passed on to investors. This is taxed according to each individual investor’s marginal tax rate. In other words, the income which an investor makes from REITs is taxed as any other income would be.

• Dividends are taxed as normal income by investors

Depreciation Expenses – REIT Tax Advantage

Depreciation expenses can reduce the amount of income received. REIT investors can minimize their taxes by writing off this depreciation on the dividends they receive.

• You can write off depreciation for REITs

REIT Summary: Big-Time, Slow-Time

REITs certainly have a good reason to exist. They offer a unique opportunity to invest in the massive and seemingly unbeatable real estate market, without having to shell out the millions, or taking up a mortgage. With less risk comes less reward though, and this type of investment is not likely to pay off quickly or heavily. It is a small and constant pay-off. This can be attractive or not depending on what you prefer!