Tax-free Capital Gains Are Here

Talk about the ultimate irony: The long-awaited era of tax-free capital gains has arrived just as the stock market has suffered one of its worst routs since the Great Depression.

Still, some investors -- perhaps those who bought stocks years ago through a discounted employee stock plan -- may still be able to sell their shares at a profit. And if they are in one of the two lowest income-tax brackets, they will pay no taxes on their capital gains if they sell before the end of the year.

The 0% capital-gains rate for those in the 10% and 15% income-tax brackets is scheduled to apply in 2009 and 2010 as well. But some skeptics worry that Congress may rescind the measure in future years as lawmakers search for revenue 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 -- grab this tax break before it disappears.

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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.)

And to take advantage of the 0% capital- gains rate this year, your taxable income can’t exceed $32,550 if you are single, $43,650 if you are a single head of household or $65,100 if you are married filing jointly. Note that this is taxable income. That’s what’s left after you subtract personal exemptions -- worth $3,500 each this year for you, your spouse and your dependents -- and your itemized deductions or standard deduction from your adjusted gross income. Any gains that lift your income above that threshold would be taxed at the maximum 15% capital-gains rate.

One group of taxpayers won’t benefit from the 0% rate -- children affected by the newly expanded "kiddie tax." Starting this year, dependent children under 19 and full-time students under 24 will be affected by the special rule that applies their parents’ higher tax rate to their investment income in excess of $1,800.