Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Don't Miss Out On The Zero Capital Gains Rate

Reducing taxes is always nice, but avoiding them altogether is far better, and it would be a shame to miss out on what may be a once-in-a-lifetime chance at a 0% tax rate. That’s the current tax on some capital gains, though you need to act quickly to take advantage before this limited-time offer disappears at the end of 2010. And while it’s commonly thought that the rate applies only to those in the lowest tax brackets, that’s not always the case.
In 2003, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) reduced the maximum tax rate on long-term capital gains from 20% to 15% for individuals in income tax brackets of 25% or higher—and to just 5% for taxpayers in the 10% and 15% brackets. The same changes also applied to taxes on qualified dividends from domestic companies.
But the best part was that JGTRRA dropped the 5% rate all the way to 0% in 2008 for those in the lowest brackets. The Tax Increase Prevention and Reconciliation Act of 2005 then extended the 0% rate through 2010. But with huge budget deficits looming, Congress seems unlikely to keep the tax break beyond the end of the year.
For 2010, the cut-off point for the 15% ordinary income bracket is $34,000 for single tax filers and $68,000 for joint filers. Yet while the most obvious beneficiaries of the 0% capital gains rate may be low-income investors—who are also the least likely to have significant investment income—it’s possible that even those in top brackets could share in the government’s temporary largesse. That’s because of the way tax liability is calculated. The amount of income qualifying for the 0% rate is based on a combination of your filing status, your taxable income, and the portion of your taxable income that consists of long-term capital gains and dividends. 
The calculations are complicated, and best left to your tax advisor. But suppose you are married, file a joint tax return, and expect to have an adjusted gross income (AGI) of $225,000 in 2010. The AGI consists of $75,000 in wages and $150,000 in net long-term capital gains. You also estimate that you will have $50,000 in personal exemptions and itemized deductions this year, resulting in a taxable income of $175,000 ($225,000 - $50,000).
In this case, the 0% rate covers $43,000 of your long-term gains. That special rate applies to your adjusted net capital gain that does not exceed the amount of taxable income that would be taxed at the 15% rate—so, in this case, the $68,000 for couples—minus the amount of total taxable income reduced by adjusted net capital gains ($175,000 taxable income minus $150,000 in net long-term capital gains). So, $68,000 minus $25,000, or $43,000.
Even if you’ll derive little or no tax benefit from the 0% rate, you might be able to shift investment assets within your family to take advantage of this soon-to-expire advantage. For instance, if you’re holding stocks with a low tax basis, you could transfer the shares to children in low tax brackets using the annual gift tax exclusion that lets you give $13,000 to each recipient in 2010. If they sell the stock before the end of the year, all or part of the gain will be taxed at the 0% rate as long as your combined holding periods for the shares exceed one year. This strategy could also work as a way to transfer a significant sum to adult children to help them buy a house, for example. You might give substantially more than $13,000 in stock, using part of your $1 million lifetime gift-tax exemption to avoid tax liability. A child could then cash out, also skipping capital gains taxes, to generate cash for a down payment. 
However, the success of this approach depends on your children’s situation. If they’re out on their own but not yet earning a high salary, they may be in the income tax brackets that eliminate their liability for capital gains. But if they’re still at home or in college, the “kiddie tax” may foil this strategy. Under the rules of that tax, investment income received by a child under age 19 or a full-time student under age 24 will generally be taxed at the top marginal tax rate of the child’s parent to the extent it exceeds an annual threshold ($1,900 in 2010). This may well dilute the tax rewards for intra-family transfers.
We can work with you and your tax advisor to help you see whether you’re in a position to profit from this undeniably appealing—but soon-to-disappear—tax break.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

©2018 Legend Financial Advisors, Inc.®. All rights reserved.