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The Tax Guy by Bill Bischoff (Author Archive)
Take Advantage of 0% Cap Gains Before It's Too Late
This happy state of affairs will continue through 2010 unless Congress changes the rules, which could easily happen if the Democrats seize full control in Washington. That means you should make every effort to take advantage of the 0% rate this year. Wait until next year and it just might be too late.
Here's how it works.
More people than you might think can benefit
As mentioned, the 0% tax rate only applies to long-term capital gains and qualified dividends that fall within the 10% or 15% federal income tax bracket. However, one can be doing quite well financially and still be within the 15% bracket.
Say you file jointly, have two dependent kids and claim the standard deduction for 2008. You could report up to $90,000 of adjusted gross income this year (including long-term capital gains and dividends) and still be within the 15% rate bracket. Your taxable income would be $65,100, which is the top of the 15% bracket for joint filers.
Say you're divorced, use head of household filing status, have two dependent children, and claim the standard deduction for 2008. You could have up to $62,150 of adjusted gross income this year (including long-term capital gains and dividends) and still be within the 15% rate bracket. Your taxable income would be $43,650, which is the top of the 15% bracket for heads of households.
Say you're single with no kids and claim the standard deduction for 2008. You could have up to $41,500 of adjusted gross income (including long-term capital gains and dividends) and still be within the 15% rate bracket. Your taxable income would be $32,550, which is the top of the 15% bracket for singles.
If you itemize deductions, your adjusted gross income (including long-term capital gains and dividends) could be even higher, and you could still be within the 15% rate bracket.
Remember: The adjusted gross income figures I'm quoting are after subtracting any write-offs allowed on page 1 of your 2008 Form 1040 (these are the so-called above-the-line deductions). Among others, these write-offs include deductible retirement account contributions, health savings account (HSA) contributions, self-employed health-insurance premium costs, alimony payments, moving expenses and more. If you have some above-the-line deductions, your income can be that much higher, and you'll still be within the 15% rate bracket.
Example: Married Joint Filer
Say you're a married joint filer with two dependent children and will report the following on your 2008 Form 1040:
Your taxable income will be $60,000 ($105,000 - $10,000 - $5,000 - $16,000 - $14,000 = $60,000). You could have up to $5,100 of long-term capital gains and/or dividends this year without owing the IRS a dime. Why? Because your total taxable income, including the gains and dividends, will still be no more than $65,100 and within the 15% rate bracket. You might have to pay state income tax on those gains and dividends, but you're free and clear when it comes to federal income tax. Any additional 2008 long-term gains or dividends would be taxed at the maximum federal rate of 15%, which is still pretty low.
Gifting shares to those in a low tax bracket is a great idea, but beware of the Kiddie Tax
If your income is too high to take advantage of the 0% rate, consider giving a loved one who falls into a low tax bracket some appreciated stock or mutual fund shares. They can sell those shares and pay 0% on the resulting gains — assuming the shares have been held for over one year when they're sold. To pass the over-one-year test, your gift recipient combines her holding period after receiving the gift with the amount of time you held the shares before giving them to her. Another option: Your low-bracket loved one can hold the shares for a while and take advantage of the 0% rate on dividend income.
Click here to find out more about this financial product and how it may apply to you.
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Order ReprintsI advise an 80 yr old with about 25K income. Her 15% bracket ends at $41,850. So I'll look to sell some long term stock with high gains, nearly $17K which would have had 5% tax last year. That's $850, better in her pocket. Chump change for a lot of people.
JOW
Here, were gonna give you something but not really!
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