“Buffett says he’s still paying lower tax rate than his secretary”
It is a common practice that you will pay taxes for anything you sell above its purchase price; you pay taxes on your profit or gains.
This type of tax is called: Capital Gains Tax
Capital Gains Tax:
This is charged on non-inventory assets. For the majority of people, this means, assets such as bonds, stocks, property and related investments.
Every time you have a capital gain, they are taxed at two rates, all depending on how long you owned this asset for. The longer the asset is held, the less taxes you pay, but for how long is it held to pay less tax?
Short-term: assets held less than 12 months
Long-term: assets held over 12 months
Below is the tax bracket for 2017:
So, if you make $50,000 a year in ordinary income, your tax bracket falls within 25%.
On the other hand, the capital gains received from the sale of long-term investments will be as low as 15% (view “Long-Term Tax” in right column, above).
Let’s compare capital gains of $100,000, both short-term and long-term:
This means that $100,000 in capital gains will not be treated as an ordinary income. If long term, it will actually help you achieve a lower tax rate.
This is one hell of an incentive that many millionaires use when reporting income taxes.
In conclusion, the longer you hold an investment for, the better for your pocket once you realize a profit. Keep this in mind when having capital gains, and you can pay as low as 15%, if applicable.