A Taxing Exercise
by Richard
Some day, many years from now, you can tell your progeny about the zero tax rate on capital gains.
Unlike most urban legends ungrounded in fact, this is the real deal.
How It Works
This little gem was inserted into the tax code when capital gains taxes were reduced overall to 15% early in George W’s administration.
Beginning in 2008, and extending through 2010 (assuming the next administration does not slam this door shut), those taxpayers who fall in the 15% marginal tax bracket are eligible for zero tax on long term capital gains.
What’s the Catch?
The net will only hold the small fry, and not the big fish who generate sizable capital gains.
This would be a couple, married filing jointly, with ordinary taxable income no greater than $65,100 or singles earning less than $32,500.
Let’s pay close attention to definitions here. We are not talking adjusted gross income (the figure found at the bottom of the first page of your two page form 1040). AGI only allows you to deduct so-called above the line deductions, like contributions to retirement accounts and health savings accounts.
We are dealing here with net taxable income, which is arrived at after claiming exemptions and either the standard or itemized deductions. Since every couple is eligible for personal exemptions of $3,500 each and at the minimum the standard deduction of $10,900, you get to subtract nearly $18,000 from your adjusted gross income to arrive at the final figure.
Itemized deductions that exceed the standard, as well as exemptions for dependents can bring the total down even further.
Clearly, the intent was to restrict this break to lower income households who do not normally generate much in the way of capital gains income.
You Might Have Some Options
Here are some options worth pursuing:
I. If Your Income Just Fell
One group that could benefit are those who acquired capital assets in prior, and more heavily compensated years, but now have downsized their income, either voluntarily or involuntarily.
This could include recent retirees, as well as those displaced from higher paying jobs due to the economic downturn.
They would be wise to sell appreciated assets this year and next, before Congress changes its mind.
Not much chance the rate is ever going to go lower than zero.
II. Give it to Your Kids or Parents
The other option is give highly appreciated assets to the adultlets in your household. In times past, you could have gifted your school age kids, but the threshold for the infamous “kiddie tax” has been raised.
As it now stands, any investment income over $1,800 is subject to the parental tax rate up to the age of 18, or 23 for dependent full time students.
But that still leaves the recent grad as a strong possibility, especially if they have taken a more altruistic and lower paying path such as teaching.
If your kids are earning above the cutoff, consider your retired parents as possible candidates.
Gifting is simplicity itself. A married couple can each use their $12,000 gift tax exemption to gift $24,000 to anybody. If both sets of grandparents still survive, that could be $96,000.
Throw in your non earning slacker graduates who are trying to get their garage band going, and we are talking big money…well into six figures that we can squirrel away.
And for those of you who are holding out for a better deal…
You must know something I don’t know.
