99Tangents

by Tom Wheelwright

The capital gains rate for certain taxpayers will drop to 0% for tax years 2008 through 2010. How can you take advantage of this 0% capital gains rate?

First, let’s review the capital gains rate in general.

Gains from sales of personal investments held for more than 12 months generally are taxed at the capital gains rate which is 5% or 15%. The 5% capital gains rate is available only to those whose ordinary income is taxed at 15% or less. The 15% capital gains rate will remain effective through 12/31/10 (barring any changes to the law prior to that time). The 5% capital gains rate will continue through 12/31/07; then the rate drops to 0% for tax years 2008 through 2010.

The 15% income tax brackets will be higher in 2008 as the IRS makes its annual adjustment for inflation, which will be announced later this year. However, to get an idea of who may qualify for the 15% and under brackets, currently in 2007 a married couple filing jointly must have taxable income (which remember is all of the taxpayer’s income less their itemized deductions) of no more than $61,300; and for a taxpayer with a filing status as single, the cutoff is $30,650.

Next, let’s review what is a capital gain.

The reduced rates for long-term capital gains generally apply to the “adjusted net capital gains”, which include net long-term capital gains (the excess of long-term capital gains over long-term capital losses) less any net short-term capital loss (the excess of short-term capital losses over short-term capital gains). This excludes sales of collectibles (such as art work), qualified small business stock (also known as section 1202 stock), and unrecaptured 1250 gains (which result from the sale of depreciable real property). These gains also include qualified dividend income (”QDI”), dividends from domestic corporations that qualify for the 15% tax rate. For most taxpayers the adjusted net capital gains is merely the sum of net long-term capital gains from real estate, stocks, bonds, and mutual funds, plus any QDI.

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!