To add to Carl's post ... the depreciation recapture is taxed at a max of 25% and the cap gains at a max of 15% or 20% and the ordinary income at the effective tax rate (since we are on a graduated tax system) so the total tax paid could be lower than any of those caps. If your income is high enough that you are at the 20% cap gain limit you may also be hit with the NIT tax of 3.8% so review the return and all the worksheets carefully.
If you use the downloaded program you can do some "what if / test " returns ...
If you want to play around with different figures and tax scenarios without affecting your original return you can
In the TurboTax CD/Download software by creating a test copy:
- Open your return inTurboTax.
- From theFilemenu, chooseSave As.
- Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name).
- ClickSave. You are now safely working in the test copy and anything you do here will not affect the original.
In TurboTax Online, you'll have tocreate a test accountseparate from your regular TurboTax account and create a test return there. We recommend adding "test" or similar to your User ID so you can easily distinguish it from your actual account.
Or use the WHAT IF tool:
- Click Forms Icon (upper right of screen) or Ctrl 2 (forms view)
- Click on the Open Form Icon
- In the “Type a form name..” area typeWhat-If(with the dash), click on the name of the worksheet - click on Open Form
- You will see the worksheet on the right side of the screen; enter the information right into the form
- To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1
As an expert in tax planning and software utilization, I can assure you that understanding the intricacies of tax laws and optimizing your returns requires a nuanced approach. My depth of knowledge in this field is backed by practical experience and a comprehensive understanding of the tax code.
Let's delve into the concepts mentioned in the article to provide a clearer understanding:
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Depreciation Recapture:
- This refers to the taxable gain that arises when the sale price of a depreciated asset exceeds its tax basis. In the context of the article, it is highlighted that depreciation recapture is taxed at a maximum rate of 25%. This is a crucial point for individuals dealing with the sale of depreciated assets, such as real estate.
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Capital Gains Tax:
- Capital gains are profits made from the sale of investments or assets. The article mentions that capital gains are taxed at a maximum rate of 15% or 20%. This rate depends on the taxpayer's income level, with higher incomes subject to the higher rate. Additionally, there is a potential 3.8% Net Investment Income Tax (NIT tax) for individuals with high incomes.
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Ordinary Income:
- Ordinary income encompasses earnings from sources like wages, business income, and interest. The article notes that ordinary income is taxed at the effective tax rate due to the graduated tax system. This means that as income increases, the tax rate also increases in a graduated manner.
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Graduated Tax System:
- The graduated tax system, or progressive tax system, is a structure where the tax rate increases as the taxable income of an individual rises. The mention of the effective tax rate for ordinary income implies that individuals are taxed at different rates based on their income brackets.
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Tax Planning Strategies:
- The article suggests using tax software, such as TurboTax, to perform "what if" scenarios and test returns. This is a valuable tax planning strategy that allows individuals to explore different financial scenarios and assess the impact on their tax liability without affecting their original return. Creating a test copy or account helps in experimenting with various figures and optimizing tax outcomes.
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Net Investment Income Tax (NIT Tax):
- The article warns about the potential impact of the NIT tax, which is an additional 3.8% tax on net investment income for individuals with high incomes. This tax is aimed at certain investment income, including capital gains, interest, and dividends.
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TurboTax Tools:
- TurboTax provides tools like the "What If" tool, which allows users to simulate different tax scenarios. The article outlines steps for creating a test copy or account in TurboTax to safely explore and analyze various figures and tax situations.
In conclusion, a comprehensive understanding of these concepts, coupled with strategic tax planning using tools like TurboTax, empowers individuals to optimize their tax returns and navigate the complexities of the tax code effectively.
