Capital Gains Are Fun!!

Capital gains can be fun for you if your income puts you in the 10% or 15% tax brackets for the years 2008 to 2010 (stop laughing).  If you are in these income tax brackets, then your long-term capital gains will be taxed at 0%.  That’s right – 0%.  Maybe you know someone who could sell some stock their Grandmother gave them, or you can sell that rental house you can’t stand managing… and pay no tax on the gains!!

Here’s what you gotta remember:

1.  For married folks, your taxable income needs to be less than $65,100 (which includes the gain on the capital asset you sold),

2.  For single taxpayers, the income limitation is $32,550,

3.  You need to have held the capital asset for at least 366 days,

4.  Some rich people (not me) will try to give their appreciated capital assets to their kids so the kids can sell them and get the 0% tax break (because the kids are in the lower tax bracket).  But the IRS has raised the age of the kiddie tax too this year, which now means the investment income of teenagers up to 19 years old (or 24 if that slacker, uh.. child, is still a dependent of their parents and going to school) will be taxed at the rate of their parents.  So the transfer of the capital asset to the child will basically have no effect.

5.  This bill was basically designed for low income older tax payers, like retirees.  But be careful.  If they sell appreciated assets, their income may qualify for the 0% tax break but be high enough to: (1) kick in tax on their social security income or (2) make them ineligible for Medicaid while trying to get into a nursing home.

6.  Tax laws like this require a lot of planning if you are looking to cash in on some appreciated capital assets you own.  Look ahead at least three to four years to plan how your income is earned, how you can control the earning of income in certain years, when your social security income will begin (age 62 or 65?), when you plan on selling the capital asset, when the asset will be considered a long-term asset (must be held for more than one year), etc.

Talk to your tax advisor.  If you don’t have one, I know a good one.

See SmartMoney’s cool calculator on this very issue here.

Go impress someone at the water cooler now.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.