Taxes are part of the American life for every working adult.  We pay taxes on our income, our homes, our property, and on our investments.  Capital Gain Taxes are specific taxes paid after the sale of an asset.  The amount of Capital Gain Taxes varies depending upon one’s tax bracket and the amount of time the investment was held before selling it.

Long term capital gains are taxed at a much lower rate as incentive to investors to fund entrepreneurial activity and to encourage capital investments.  This preferential treatment is aimed at assisting with economic growth. Therefore short term capital gains are taxed at a higher rate. Short term is defined as being held for less than a year before being sold.

The long term capital gain taxes for assets held for more than one year is currently 15%.   For those that are in low tax brackets the rate is currently 5%.  These rates were lowered in 2003 in an effort to stimulate the economy and encourage long term investments. The previous rate of 20% will be reinstated by the year 2011

The US government does allow for capital gain taxes to be deferred or reduced if certain criteria are met.  Some of the methods to defer or reduce your capital gain taxes are as follows:

• Charitable Trust: donating equity to charity
• Tax Loss Harvesting: Affluent investors can carry tax losses forward for months or years and apply them to offset capital gains
• 1031 Exchange: Exchanging for “like kind” property, this usually only applies to real estate and tangible property that must be business related.  Tax is deferred until property is subsequently sold.
• Structured Sale: also called Ensured Installment Sale, this is an annuity that defers capital gain taxes until after the final installment payment is made.

There are other ways to defer and or reduce your capital gain taxes.  You will need to contact a tax professional in order to find the options that fit your particular scenario.

Unlike most other countries, United States citizens must pay tax on income regardless of where in the world they live.  There are some offshore banks that claim to be tax havens, but the U.S. law requires its citizens to report income from those accounts as well.  If one fails to report income from offshore accounts they can be prosecuted for tax evasion under American law.

The reduced long term capital gain taxes rate was scheduled to expire in 2008 however it was extended through 2010 by President Bush.  It was amended again by President Obama to extend to 2011.

One of the many criticisms of Capital Gain taxes is that it doesn’t take into consideration inflation.  If the gain was due to inflation or if the gain did not keep pace with inflation, either way the income is still subject to the capital gain tax, even if in reality it was a loss due to inflation, it is still taxed.

It is recommended that you meet with a tax professional when reviewing your investments and deciding to sell.  Often times it is financially more rewarding to hold onto your investments a bit longer rather than face a higher capital gain tax.