These gains don't cause pain. A capital gain is the amount of money you pocket by selling one of your investments for more than you paid for it. Technically, capital gains only count for what's called a capital asset, but that's really just anything you own for investment purposes. Stocks and bonds obviously qualify, but your house and household furnishings can also count.

For tax purposes, capital gains are classified as either long-term (held for more than one year) or short-term (held for less than one year) and there are different tax implications for how long you hold onto a capital asset. For most long-term capital gains, you're taxed no more than 15% of the value of the asset. Short-term gains get taxed as regular income, so you pay the rate for the tax bracket you're in.

Capital gains can also be realized or unrealized. When you physically sell an asset like a stock, you've realized the capital gain. When you're holding the stock, and it has a value over its purchase price, but you're not selling it, you've got an unrealized gain, and you won't realize it until you sell.

In a perfect world, we'd all have capital gains. But no one¿s that smart or lucky. When the value of an asset at sale is below what you've paid for it, it's called a capital loss. The good news is that the government lets you count that loss against any gains you've had, lowering the taxes you pay. In fact, many people who sell a stock that has risen far over their purchase price tend to sell some stinkers, too, at the same time for the tax benefit. This is known as a capital-loss offset.

Home / Personal Finance / Financial Planning / Family & Estates

Friday, September 02, 2005

Tax Breaks for Child Care

Email this Story | Respond to Editor | Print

Smart Money

I am a new mother. Can I write off my day care expenses?

While you won't be able to recoup the sleep you lost during those midnight feedings, if you're a working mother (full time or part time), Uncle Sam does offer some relief. These breaks come in two different forms. You can either use pretax dollars to pay for up to $5,000 in child-care expenses through a flexible spending account, or FSA, offered by your employer. Alternatively, when you file your taxes, you can take a partial credit on up to $2,400 in child-care expenses (if you have one child) or $4,800 in expenses (if you have two or more). Mercifully, the definition of "expenses" is pretty generous — it generally includes the cost of preschool, a nanny and even summer camp.

To take advantage of these tax breaks your child must be younger than age 13 and the child care must enable you (and your spouse, if you have one) to work, explains Stephanie Breedlove, CPA and partner of Breedlove & Associates, a nanny consulting service in Austin, Texas. (An exception: if one parent is a full-time student or severely disabled.)

You generally can't take advantage of both tax breaks. But if your employer offers a dependent-care FSA, this is almost always the way to go. With the FSA you can shield up to $5,000 of your income from federal, state and local taxes as well as Social Security and Medicare taxes. Just make sure you don't put more in your account than you need for the year. FSAs operate on a "use it or lose it" basis, so any leftovers at the end of the year will be lost to you forever. Of course, given the cost of child care these days, chances are you'll end the year wishing you could exempt more of your income from taxes.

Even if you've never heard about a flexible spending account program at your company, you should check with your human resources department to make sure. "Most companies don't advertise it because not everyone in the company needs to take advantage of it," says Breedlove.

The child- and dependent-care tax credit is clearly not as lucrative. Depending on your income, it will only allow you to recoup 20% to 30% of your expenses up to the limits mentioned above. If your adjusted gross income exceeds $28,000, for instance, the maximum credit you can receive is $480 for one dependent and $960 for two or more dependents. You'll need to fill out IRS Form 2441 if you're filing Form 1040.

Keep in mind, you won't be able to get any tax relief if you're paying your neighborhood babysitter under the table. If you're paying a babysitter or nanny more than $1,200 a year, you are by law required to withhold payroll taxes.