Tax Tips
Tax Tip No. 12: Wait Out the Capital Gains Tax
Taxpayers in the two lowest income tax brackets will pay no capital gains taxes next year.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 18, 2007
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Patience is a virtue and some taxpayers will be able to reap the benefits if they wait until next year to sell stocks or mutual funds. That’s when a temporary 0% capital gains rate goes into effect for taxpayers in the two lowest income tax brackets
The tax-free treatment of long-term capital gains is scheduled to apply in 2008, 2009, and 2010, but some skeptics worry that Congress may rescind the measure in future years as it searches for revenues to offset other tax changes. So if you’re likely to benefit from this strategy—perhaps if you are self-employed or retired and can control the timing of your income—set your sites on 2008 to cash in on the break before it disappears.
To qualify for preferential long-term capital gains treatment, you must hold shares for more than a year before selling. (This applies to assets in taxable accounts, not those in retirement accounts which are taxed at your ordinary rates upon withdrawal.)
The top capital gains rate is 15% compared to a maximum income tax rate of 35%. This year, those in the 10% and 15% income tax brackets qualify for a 5% capital gains rate and next year, their capital gains tax disappears. To take advantage of the 0% capital gains rate in 2008, your taxable income can’t exceed $32,550 if you are single or $65,100 if you are married filing jointly.
But one group of taxpayers won’t benefit from the zero capital gains rate—children affected by the newly expanded "kiddie tax." Starting next year, dependent children under 19 and full-time students under 24 will be affected by the special rule applies their parent’s higher tax rate to their investment income in excess of $1,800.
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