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Estimated and Capital Gains Taxes


Estimated Taxes

Estimated tax payments are quarterly tax payments made by individuals whose taxable income will be larger than any tax withholdings made on their behalf by employers. The average person generally does not need to pay estimated taxes because the tax payments withheld by their employer are generally enough to cover their actual tax due at the end of the year. People who are self-employed (or who work for themselves in a second job so as to boost their income), or who derive income from rental properties often do need to make estimated tax payments. The rule is that you are required to deposit estimated and withholding taxes equal to 90% of your current year's liability or 100% of last years taxes.

To calculate the amount you are responsible for paying in estimated taxes for this year, take a look at your tax return for last year. Look for the lines that indicate your total tax and your total withholding. You need to pay any difference between these figures in estimated taxes this year. Divide the number by 4 if you intend to pay taxes quarterly and by 12 if you want to pay monthly.

Capital Gains Tax

Your income is computed by adding together all the money you earn in a given year and not just on the basis of salary. If you sell property during a tax year, such as a house, or a stock or mutual fund, and that property has appreciated (gained in value) since you first bought it, you will likely owe capital gains tax on the income derived from the sale of that property.

A capital gain is money you make when you sell an investment for profit, provided you have owned that investment for more than one year. An investment in this sense can be your home, a farm, a business, etc. When you make a profit on the sale, the difference between what you paid and the selling price is roughly the amount of the capital gain. So, if you bought a stock for $100, and sold it 18 months later for $150, you have a capital gain of $50. If you lost money, the loss would be called a capital loss. You would be able to deduct the loss from other capital gains to reduce taxes owed on those capital gains.

Capital gains are calculated by adding together the price you paid for the investment, any costs associated with the purchase (sales fees or commissions, for example), any repairs or maintenance fees you may have expended (if the investment was your home), and any costs associated with the sale of the item. If you had any depreciation that you deducted on your taxes in previous years, you would subtract this amount from the subtotal. The resulting figure is called your cost basis. Your capital gain (or loss) is the difference between your cost basis and the amount you sold your investment for.

It is not always the case that your full capital gain is taxable. Some types of investments are excluded, partially or in full, from the capital gains tax.

You may be able exclude up to $250,000 ($500,00 if married and  filing jointly) of the sale price of your primary residence from capital gains tax, for example. To determine how much of your capital gain realized upon the sale of your house you would owe taxes on, then, you would subtract the $250,000 ($500,00 if married and filing jointly) exclusion amount from the amount of the gain. This amount is called your taxable gain and is used to determine how much capital gains tax you will pay.