Credit: Further, your capital gains may be subject to an additional "net investment income tax" of 3.8%, depending on your income and tax filing status. The table below comes from the IRS and shows the modified adjusted gross income thresholds that would make your capital gains subject to that net investment income tax:Source: U.S. Internal Revenue Service, publication 550.
Further, your capital gains may be subject to an additional "net investment income tax" of 3.8%, depending on your income and tax filing status. The table below comes from the IRS and shows the modified adjusted gross income thresholds that would make your capital gains also subject to that net investment income tax:
Source: U.S. Internal Revenue Service, NIIT Frequently Asked Questions page
To qualify for that exclusion, during the five year prior to the sale, you must have owned the home for at least two years (the ownership test) and lived in the house as your primary residence for at least two years (the use test). And during the two-year period ending on the date of the sale, you must not have excluded the gain from the sale of another home.
Offsetting gains with losses
Within a given tax year, your capital losses can be used to offset your capital gains. If your capital losses exceed your capital gains, you can use up to $3,000 of those losses ($1,500 if married filing separately) to offset ordinary income. Any additional capital losses are "carried forward" to future years and can still be used to offset future gains.
Short-term losses first offset short-term gains, and long-term losses first offset long-term gains. If, after that like-for-like netting, you still have losses of one type left over, you can use those losses to offset the other type of gain. Only after that point would you use your capital losses to partially offset your ordinary income or carry them forward for future years.
Complicated but worth understanding
The capital gains tax is complicated, but it's certainly worth getting to know if you're an investor. After all, that tax only applies if you close an investment. While you may sometimes be forced out of an investment because, for example, it was acquired or a fund you own sold its position, you generally have significant control over whether and when to take a capital gain.
It's a good rule not to let the tax tail wag the investment dog, but it's also important to consider the net amount you'll be left with after taxes when you close out your investments. Successful investing can create an incredible source of wealth, and once you understand exactly what is the capital gains tax, you can capture more of the wealth you generate from your investing for yourself.
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The article What Is the Capital Gains Tax? originally appeared on Fool.com.
Chuck Salettaisa Motley Fool contributor . Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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