People who invest their money can receive two types of income from it: ordinary income and capital gains. But, what are the differences and how do you know what your action on independent financial advice berkeley ca is going to fall under? Ordinary income is just that; ordinary. Any interest and dividends that you accrue normally on your investments are counted in this category. At the end of each year, you’ll get a form called a 1099-INT from each of the financial institutions that you have investments at.
When you sell anything that is considered a capital asset (can be property, items, whatever), it’s a capital gain. The difference between what you sell it for and what you paid for it is referred to as a capital gain or loss. These gains and losses are required to be reported on your taxes.
So, why do they matter? Well, technically, they’re another source of income. And, if you’re earning money, the U.S. Government has to tax it. But, unlike ordinary income, you can time when your item is taxed. Say you’re considering selling a capital asset in November. If you want to claim it on the current year’s taxes, go ahead and sell it now. But, if you want to delay paying that tax a bit, delay selling it until January. Then, you’re not required to pay on it until the next tax season.
Long-term capital gains are on a different tax schedule than short-term ones. Short-term capital gains are taxed at the same rate that ordinary income is; long-terms run a little differently depending on your income. In order for a capital gain to be considered long term, you must have held the capital asset for at least a year and a day before you sell it. Any retirement funds are not taxed if they are a tax-deferred investment (IRA’s, etc).