The Tax Club Report

During 2009 and 2010, if your tax bracket is 10% or 15%, the tax rate for long-term capital gains and qualified dividends will be 0%.  This compares to the 15% top rate others will pay on those types of income.

Single taxpayers with taxable income up to $33,950 and married couples filing jointly with taxable incomes up to $67,900 qualify for the 0% rate. The 0% rate applies to any long-term capital gains that qualify for the 15% rate for other taxpayers, not just to gains on publicly-traded stock.

Because the tax rates are graduated, you may be able to benefit from the 0% rate, even if your total income may be above the threshold. Remember, we are referring to “taxable income”, NOT gross income. You are entitled to personal exemptions ($3,650 per exemption) and at least the standard deduction ($11,400 for married, and $5,700 for single). As a result, your gross income could be $15,050 higher for a married couple and $9,350 more if you are single, and still qualify for the 0% rate.

And it could be higher if you are over age 65 or if you itemize your deductions.

This break may be especially useful for a retired couple who has some potential capital gains. For example, assume a retired couple has taxable income of $40,000. In 2009 they could realize a long-term capital gain of up to $27,900, and not pay any additional tax. Before this, that capital gain would have been taxed at 15%, meaning an additional federal tax of $4,185.

If you are in a low-bracket and you are sitting on unrealized capital gains, you may have been reluctant to sell because of the built up capital gain. For 2009 and 2010 at least, you may be able to avoid the tax all together, freeing up more capital. Another opportunity presents itself for taxpayers who are supporting parents in a low tax bracket. The taxpayers could give some appreciated securities to the parents, who sell them and pay 0% tax. The amount given should stay within the annual gift tax exclusion amount of $13,000 ($26,000 if a married couple elects to “gift splitting”) to avoid owing gift taxes or using part of the lifetime gift tax exemption. The exclusion is per recipient, so the amount you can give away would be doubled if the gifts were given to each person of a married couple.

Gifts of appreciated securities also could be made to children in low tax brackets, but the gifts would have to be made to adult children. Recent changes in the “Kiddie Tax” will prevent high income parents from giving securities to their minor children to sell and pay 0% capital gains taxes. To avoid the restrictions, the children must be over 21 or over 23 if they are full-time students. The restrictions also can be avoided if the children do not qualify as dependents on their parents’ tax return by providing more than 50% of their own support and earning income. Youngsters who do not meet those exceptions must have incomes less than $1,900 to qualify for the 0% rate.

If you require a free consultation with The Tax Club, please feel free to call us at 866-840-1829 x5438

Tags: Capital Gains, Income Tax, the tax club

This entry was posted on Friday, January 8th, 2010 at 2:27 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.