Call Today! 303.841.4920

19755 East Pikes Peak Ave, Suite 101, Parker, CO 80138

19755 East Pikes Peak Ave, Suite 101, Parker, CO 80138

2010 Tax Countdown – Yes, Virginia, There Really is a 0% Capital Gains Tax Rate

12/03/2010

You read that right. There is a 0% capital gains rate in effect for 2010. That means NO TAX (or reduced tax) on long term capital gains on sale of stock other securities or any capital asset, like a second home. We don’t know yet if it will be extended to 2011, so if you qualify – think about taking advantage of it before December 31. Remember that long term means you have held the asset for more than a year. This, of course, does not apply to IRAs or other pension funds or distributions (cap gains inside of retirement accounts are not taxed currently). Here is how it works:

You Qualify! – if you are in a 15% or lower income tax bracket. Keep in mind that the amounts listed below are TAXABLE INCOME, not gross or adjusted gross income. Taxable Income is the amount you are actually taxed on AFTER reducing adjusted gross income for itemized deductions (or standard deduction) and personal exemptions.

Married Filing Jointly – taxable income $68,000 (or lower)
Single – taxable income $34,000 (or lower)
Head of Household – taxable income $45,550 (or lower)
Married Filing Separately – taxable income $34,000 (or lower)

If your total taxable income including long term capital gains is lower than the amounts shown above, you will pay no tax on long term capital gains. If your taxable income including capital gains is higher than the bracket thresholds, you may still have a 0% tax rate applied to a portion of your long term capital gains. For example, if you are single and your W-2 wages are $30,000 and your long term capital gain is $10,000, your adjusted gross income equals $40,000. Then you are allowed to take either a standard deduction or itemized deduction and your personal exemption. So: $40,000 minus $5,700 (standard deduction) minus $3,650 (personal exemption) = $30,650. You will pay no tax on your capital gain. Let’s say that your W-2 wages are $33,000 and your long term gain is $15,000 to total $48,000. Take away your standard deduction and personal exemption and your taxable income is $38,650. You would pay no tax on $1,000 of capital gains (the difference between your wages of $33K and the bracket limit of $34K) and then 15% tax on the remaining $14,000 of gain.

The Possibilities :

1. Sell High, Buy High. If you are sitting on a chunk of stock and your income is low (unemployed for part of the year?; retired?; underemployed?), consider harvesting some long term capital gains, taking care to remain below the thresholds. Then if you like, buy it back at the current price. You will have a new higher basis and will have taken advantage of the 0% tax rate. I can find no law that says you cannot buy the same stock on the same day at the same price. It seems too good to be true.

2. Gift Stock to Elderly Parents or Your Adult Children (over age 24 to avoid kiddie tax). If your parents or kids are in the lower tax brackets and you would like to give them money this year, consider gifting stock to them and they can sell it without taxation. Remember that you can gift up to $13,000 to anyone you like this year. You and your spouse together can gift up to $26,000 to anyone. The gift is NOT deductible to you and is NOT taxable OR reportable income to the recipient. The recipient’s basis in the stock is the same as yours. BUT the gift is valued at the fair market price. That means that IF the stock is worth $13,000 but you only paid $5,000 for it, the gift is a $13,000 gift.  The recipient’s basis is $5,000 (this does NOT work for losses–get help from a tax pro).  When the stock is sold by the recipient, the gain on the sale will be taxable income, but if the rules above are followed, the result could be zero cap gains tax and thus more money in the pockets of your parents or kids. Another caveat—the sale will result in an increase in adjusted gross income for your parents which in turn could cause more of their Social Security to be taxed thus interfering with this overall strategy – get help from your CPA. Even in the case of zero tax, tax law is complicated.

Leave a reply