What Are Capital Gains?

We all know what income is – the money or resources that come in, versus what goes out. But the IRS tax code classifies different kinds of income

in different ways, and each gets treated differently at tax time.

Ordinary income is the most familiar kind. This category includes income from wages, salaries, tips, and anything else you receive in exchange for providing a service. It can also include income from a business, from interest, or from certain types of dividends.

But there’s another kind of income: capital gains. Capital gains income comes from the sale of property you own for personal or investment use—for example, your house or your furnishings—and have had for more than a year.

Capital gains get special treatment at tax time. The IRS taxes your capital gains income at a lower rate than ordinary income, usually at less than 20 percent. Capital gains income also doesn’t incur self-employment tax, which can add an additional 15.3 percent in taxes.

That’s why it pays to know how capital gains can benefit you and your woods.

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