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The Tax Guy by Bill Bischoff (Author Archive)
Understanding the New Tax Law
Long-Term Capital Gains Rates Extended
The biggest and best news in TIPRA is the extension through 2010 of the very favorable federal income tax rate structure for long-term capital gains (which applies to investment assets held for more than one year) and qualified dividends (which include most dividends paid by large corporations as well as those by paid out by small closely held domestic C corporations).
Specifically, the highest federal rate on most long-term gains will remain at the current 15% mark through 2010. The current 5% rate on most long-term gains earned by individuals in the 10% and 15% federal income tax brackets (the two lowest brackets) will continue through 2007 and then drop to 0% (that's right folks!) for 2008 through 2010. These same rates will also apply through 2010 to qualified dividends. (Before the TIPRA changes, the rates on long-term gains and qualified dividends were scheduled to rise after 2008.) TIPRA also extends through 2010 the current 28% top federal rate for long-term gains from collectible sales and the 25% maximum rate for long-term real-estate gains attributable to depreciation write-offs.
Bottom Line: It's basically business as usual for investors — except those in the lowest two tax brackets who can now look forward to three years of that sweet 0% tax rate (for 2008 through 2010).
Federal Tax Rates on Long-Term Gains and Qualified Dividends | ||
| 2006-2007 | 2008-2010 | |
| Folks in 10% and 15% tax brackets | 5% | 0% |
| Folks in higher brackets | 15% | 15% |
Another One-Year Band-Aid for the AMT
More good news: TIPRA includes two one-year fixes (for 2006 only) that greatly reduce the odds you will be hit with the dreaded alternative minimum tax (AMT) this year.
The first fix increases the 2006 AMT exemptions (basically deductions claimed when calculating whether you owe the AMT or not) to the following amounts:
$62,550 if you are married and file jointly (up from $58,000 for 2005). Without the fix, your 2006 exemption would have been only $45,000. $42,500 if you file as a single person or head of household (up from $40,250 for 2005). Without the fix, your exemption for this year would have been only $33,750. $31,275 if you are married and file separately from your spouse (up from $29,000 for 2005). Without the fix, your 2006 exemption would have been only $22,500.Thanks to the second fix, you can use your nonrefundable personal tax credits (such as the dependent care credit and the education tax credits) to reduce both your 2006 regular tax bill and your 2006 AMT bill (same as last year).
Bottom Line: After these fixes, it's basically business as usual on the AMT front, too. So if you did not owe the AMT last year, you probably won't owe it this year either — unless something in your tax life has changed significantly (such as getting a big raise, triggering a bunch of capital gains, exercising appreciated employer stock options, moving into a state with a hefty personal income tax, or becoming the parent of quadruplets).
Click here to find out more about this financial product and how it may apply to you.
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