What is the difference in tax rates between ordinary income and capital gains?

The topic of this article is the answer to the following question: what is the difference in tax rates between ordinary income and capital gains?
Let’s start the article by going over what exactly capital gains are. Capital gains is the term for the profit that you get when you sell an asset, like a stock, that you bought at a lower price than you sold it for. Capital gains can be achieved on stocks, on bonds, on property, and on precious metals like gold or silver. While many countries out there actually do not levy a capital gains tax, the United States does have a capital gains tax. It is important for you to know about capital gains and capital gains tax so that you can arrange your investments and your tax strategy accordingly.

In the United States, an individual or a corporation will be charged an income tax on the net total of all capital gains. This is charged in the same way that income tax is charged on your regular income. However, there is a different income tax rate for long-term capital gains. Long term capital gains are the gains that you make on assets that you hold for one entire year before you sell them. The income tax rate on long term capital gains is lower than short term capital gains. In 2003, the income tax rate on long term capital gains was reduced to 15% of the capital gains. If you are an individual in the lowest two income tax brackets, then the income tax on your capital gains will only be 5%. However, in the year 2011, then the capital gains tax rate will go back to the rates that were used before 2003, or they will “sunset.” Generally, the rate is 20% on long term capital gains.
Short term capital gains are taxed at a higher rate than long term capital gains. Short term capital gains are taxed at the same rate as the ordinary income tax rate. In the years 2008-2010, the income tax rate on eligible dividends and also on capital gains will only be 0% for individuals who are in the 10% and 15% income tax brackets. However, after 2010, dividends will be taxed at the regular income tax rate with no consideration of the individual’s income tax bracket. The long term capital gains tax rate will be 20% for everyone who is not in the 15% tax bracket, and for those who are in the 15% income tax bracket, the capital gains tax rate will be 10%. Also after 2010 the qualified five-year capital gains income tax rate of 18%, or 8% for all taxpayers who are in the 15% income tax bracket, will once again be the capital gains income tax rate.
So, now that we’ve gone over all of the complicated rates and when they are going to change, let’s talk about how the taxable amount of the gain is determined. Instead of using the purchase price to determine the taxable amount, instead a cost basis is used. The way to determine a cost basis is by taking the original purchase price, then adjusting the purchase price for a whole bunch of different things like additional improvements or investments, and then whatever taxes are paid on dividends, any depreciation, or any certain fees.
There are a lot of different exemptions and exclusions that are also figured in to deciding the capital gains tax. Some examples are that if you are an individual, you can deduct up to $250,000 and if you are a married couple you can deduct up to $500,000 on the sale of real property if you used it as your primary residence for at least two of the five years before the property is sold. There are also allowances made for disability, partial residence, and military service.
In short, you probably will want to talk to an investment and/or a tax specialist to sort out the best way to engineer your investments so that you most effectively can pay your capital gains taxes. It’s a complicated system, and you will need help to navigate the whole capital gains tax maze.