What is Capital Investment?

Profits earned through buying and selling capital assets are known as capital gains. Capital assets can include anything from stocks, bonds and mutual funds, to real estate and collectibles such as precious metals, coins and fine art. Wages, interest and dividends are considered ordinary income, not capital gains income. 

Many people invest in stocks, bonds and mutual funds through a tax-deferred retirement account. The good news is that investment profits from these types of accounts are not reported as capital gains but as ordinary income when withdrawn.
 
When talking about capital gain holding periods, the tax difference is calculated by whether your investment is considered long-term or short-term. If you have had your investment for a period of less then one year, it is considered short-term and taxed at ordinary income tax rates.

Jim Byrd from Safe Harbor Financial Services says the long-term holding period is more then a year. Capital gains on long-term investments are taxed at discounted rates. The rate for long-term capital gains will be either 0% or 15%, depending on your tax bracket.

In addition to Federal tax, your capital gains will also be subject to state income taxes. Many states do not have separate capital gains tax rates. Instead, most states will tax your gains as ordinary income subject to the state income tax rates. Byrd says tax planning for investors focuses on deferring the sale of profitable investments until you qualify for the discounted long-term capital gain tax rate.

As the US average age rises, the costs to o supply health coverage in the form of Medicare is also rising. To pay for these benefits, surtax, also referred to as Medicare 3.8 percent tax, will begin in 2013. This will affect single taxpayers with modified adjusted gross incomes of $200,000 or more, married taxpayers with modified adjusted gross incomes of $250,000 or more, married taxpayers filing separately with MAGI in excess of $125,000, trusts and estates that file their own returns and have MAGI in excess of $11,650.

Unearned income, which means investment income such as interest, dividends, capital gains, rent and royalties will be taxed. Byrd says municipal bond interest will not be subject to the 3.8% surtax. It will apply to either the amount of MAGI that exceeds the threshold, or the investment income, whichever is less.

Byrd says for example, if you are married, and your modified adjusted gross income is $270,000, and your investment income makes up $60,000 of that amount, you’ll pay the 3.8% Medicare tax only on the amount of investment income that exceeds the $250,000 threshold, so on $20,000.

Byrd says if your investment income were only $10,000 and your modified adjusted gross income was $270,000 you would pay the 3.8% Medicare tax on $10,000.

He says technically, IRA distributions are not be subject to this new 3.8% surtax,  however, IRA distributions may increase your MAGI, which in effect could make some of your other investment income subject to this 3.8% tax.

He says for example, if you had $230,000 of investment income and a required minimum distribution of $35,000, your MAGI for the year would be $265,000, making $15,000 of your investment income subject to the  surtax. Income from non-qualified annuities, for example annuities that are not  IRAs, 403bs or 401ks, is considered investment income and will be subject to this tax.

Jim Byrd offers a free comprehensive financial review of your portfolio and a free copy of his DVD or book, The Ultimate Success Secret. You can get more information when you email Jim Byrd at jbyrd@safeharfin.com or when you call 1-877-251-1984.

James Byrd has 30 years of experience, is Top of the Table of the Million Dollar Round Table, and a member of the Better Business Bureau and the National Ethics Bureau. Safe Harbor Financial Services has been awarded Small Business of the Year 2012 for South Eastern Alabama by the Easter Shore Chamber of Commerce.

Safe Harbor Financial Services
9056 Merritt Lane
Daphne, AL 36526
(251) 625-1226
www.safeharfin.com

Sponsored by Safe Harbor Financial Services