During 2008, 2009 and 2010, there will be an opportunity for certain qualified taxpayers to sell appreciated assets without paying any capital gains tax. This rare zero percent tax bracket for capital gains will last only during the current three-year window of opportunity, and many people have some basic questions about how best to take advantage of this new tax break.
Q: Who qualifies for this zero percent tax break?
A: The zero bracket applies only to taxpayers who are in the two lowest federal income tax brackets of 10% and 15%. The favorable zero bracket covers long-term capital gains–assets that have been owned for more than one year (after being offset by net short-term losses). Qualified dividend income also is covered. Thus, a married couple filing joint returns for 2008 with taxable income of less than $65,100, or a single person with less than $32,550 of taxable income, can take advantage of the new rate.
Q: If I don’t qualify, can I give assets to someone else who does qualify?
A: Yes, but beware! Shifting income has potential unwanted consequences, such as causing ineligibility for college aid to a young person, ineligibility for Medicaid to an older person, or the taxation of Social Security benefits. In addition, Congress has anticipated certain transfers to children and has expanded the “kiddie tax” rules that tax a child’s unearned income at a parent’s tax rates for children up to the ages of 19 and, for full-time students or dependents, 23. That still leaves open the potential for parents to gift appreciated assets to any of their adult children who are in the 15% or lower income tax brackets. Reverse generational gifting from child to parent also can work effectively.
Q: Should I sell a highly appreciated asset to take advantage of the zero bracket while I can?
A: Asset sales should not be driven by tax considerations. Ask yourself a few questions about the asset that has appreciated in value. Will the investment continue to appreciate? Is this the optimal time to sell? How much are the gains and what would the tax consequence be if the asset were sold in 2011, i.e., after the zero tax bracket is no longer available? Should the asset be given to charity?
Q: Should I sell my house to take advantage of the zero percent tax bracket?
A: Probably not. Up to $250,000 of capital gains on a home are already exempt from taxation for a single homeowner using the home as a residence for at least two of the past five years. The exemption is $500,000 for a married couple. Moreover, housing needs and preferences may offset tax savings.
Q: What should I do about this zero capital gains bracket?
A: Take advantage of this tax break if you can, but only if it makes sense in the context of your overall financial plans. Get professional tax and investment advice and look before you leap.
© 2008 M.A. Co. All rights reserved.
