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Matthew J. Steinberg:

A taxable event. The phrase sounds intimidating. But at its core, it's a simple concept. Any transaction that triggers your need to pay federal, state, or local taxes is a taxable event.

This includes things you do every day, like earning money at a job, buying food at a restaurant, taking a distribution from a retirement plan, selling publicly held stock, and the list goes on and on. Taxable events can trigger many different types of taxes, such as income, capital gains, self-employment, excise tax, and many others. Today, we are going to focus on taxable events that are subject to ordinary income tax or capital gains tax since they are frequently encountered.

Actually, you're probably already familiar with ordinary income tax. This is the tax you pay on the wages earned from your job. The ordinary income tax rate also applies to the income component of distributions you receive from a trust, certain dividends you earn, or funds you withdraw from a traditional retirement account. What is the ordinary income tax rate? It depends on how much you earn.

In the US, we use a graduated tax system. Different portions of your income are taxed at different rates using brackets that increase from 10% all the way up to 37% for the highest earners. Basically, the more you earn, the higher your tax rate.

Capital gains tax may be less familiar to you. Any profit you earn from the sale of an asset is subject to taxes. When you sell things like stocks and bonds, real estate, artwork, jewelry, a vintage car, or cryptocurrency, you will owe tax on the profits from the sale. The rate you'll pay on capital gains depends on several factors, including how long you've held the asset.

Those held for less than a year are taxed at your ordinary tax rate, the same as your income from work. If you've held the asset for more than a year, however, you'll enjoy the preferential long-term capital gains rate. For the sale of stocks and bonds, this will be either 0%, 15%, or 20% depending on your total taxable income.

Special rules are associated with collectibles that can result in a higher tax rate. Also, real estate is subject to depreciation recapture, which can also boost your tax rate.

Even though it's not the focus of this video, I should mention that there's also something known as a net investment income tax. This tax impacts higher earners and applies an additional 3.8% surcharge tax on things like interest, dividend income, capital gains, and profits from other passive investments. In any event, capital gains tax can really add up.

Think about the kind of value a home, piece of artwork, or stock can accrue over decades. There are also a few tactics you can use to lessen the impact of significant taxable events. First, hold on to big investments for more than a year. If you day trade or flip houses in a matter of months, you'll be paying a short-term capital gains tax, which is the same as your ordinary income tax rate.

In most scenarios, a significant amount of the profits associated with the sale of a personal residence are exempt from taxes, $250,000 for individuals and $500,000 for married couples filing jointly. Second, consider a tax loss harvesting strategy. This is when you sell an asset at a profit and then sell another at a loss to reduce your total taxable income.

For example, you sell stock from Company A at a profit of $10,000 and sell stock from Company B at a loss of $10,000. The result from this transaction would be a wash, resulting in no capital gains. There's a bit of an art to creating an effective tax loss harvesting strategy. Picking the right asset to sell can be complicated.

So speak with a financial expert to discuss your unique situation. To recap, a taxable event is any transaction that results in you owing federal, state, or local tax. Different taxable events incur different types of taxes. Wages from a job are generally subject to ordinary income tax.

Any profit resulting from the sale of an asset is subject to being taxed. Long-term capital gains receive preferential treatment. If you're selling an asset at a significant profit, a tax loss harvesting strategy may help reduce your total taxable income. For more information about taxes and tax strategies, please reach out to your trusted financial advisors.

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