Quiz: Do you know How the Capital Gains Tax Works?
About This Quiz
Most Americans have a healthy fear of the Internal Revenue Service. We all want to know how to reduce our income tax, including the dreaded capital gains tax. This quiz will help you navigate the slippery slopes the capital gains.
You are charged capital gains tax when you _____ an asset.
Even if you bought your home for $100,000 and an appraiser has recently valued it at $200,000, you will not owe capital gains tax until you sell it.
Which factor is the most important in determining your capital gains tax on a given asset?
your income tax bracket
The more money you earn and the higher your income tax bracket, the higher the capital gains tax you will pay. In the case of short-term investments, you will be taxed at the same rate as your income tax.
Taxpayers in the 15 percent tax bracket will pay ________ on long-term capital gains.
As of 2008, if you were in the 15 percent tax bracket, you paid only 5 percent tax on long-term capital gains, but that rate dropped to zero in the 2008 tax year. Everyone paid a flat rate of 15 percent.
Which type of investment will help you save on your capital gains tax bill?
To lower the amount you owe in capital gains tax, stay away from short-term investments. This is especially true if you belong to the lowest tax brackets, in which the tax rate is zero on long-term capital gains on most securities.
What's a legal way to avoid paying high capital gains tax ?
Invest in tax-deferred retirement accounts.
You can legally shelter your income in tax-deferred retirement accounts like 401(k)s, Roth IRAs and traditional IRAs. As long as any money earned from the sale of a security is reinvested in another security, you can buy, sell and exchange them without being charged any capital gains tax.