MAXIMUM CAPITAL GAINS RATE REDUCED TO 0%
FOR SOME NONCORPORATE TAXPAYERS IN 2008, 2009, 2010
For some noncorporate taxpayers, the maximum tax rate for capital gains is reduced to 0% for tax years 2008, 2009 and 2010. Internal Revenue Code (IRC) § 1(h)(1)(B). The amount of income taxed at 0% depends on the interplay between an individual's filing status, his taxable income, and how much of that taxable income consists of long-term capital gain and dividends. Capital gains not taxed at the 0% rate are taxed at a 15% rate. IRC § 1(h)(1)(C).
The 0% tax rate applies to the sum of "adjusted net capital gain" and qualified dividend income, but only to the point that amount exceeds the amount of taxable income that would be taxed at a rate below 25% over the taxable income reduced by the adjusted net capital gain. The definition of a capital gain is the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. IRC § 1222(9). Net capital gain is defined as net long-term capital gains minus net short-term capital losses. "Adjusted net capital gain" excludes from net capital gain the sales of depreciable real property (unrecaptured section 1250 gain which is taxed at no more than 25%), sales of some small business stock under section 1202, and sales from collectibles (which are both taxed at no more than 28%), and includes qualified dividend income. IRC 1(h)(3). The amount of taxable income that would be taxed at a rate below 25% would be the top of the 15% tax bracket, since the next bracket for 2008 would be the 28% bracket.
The simplified formula for the taxpayer's adjusted net capital gain taxed at 0% is:
(1) The taxpayer's top amount for the 15% tax bracket; minus
(2) The taxpayer's regular taxable income (taxable income minus adjusted net capital gain).
For 2008, the top amounts for the 15% tax bracket are:
Married Filing Joint Return $65,100
Single and Married Filing Separate $32,550
Head of Household $43,650
Example 1: Husband and Wife have taxable income of $65,100 for 2008 that consists entirely of qualified dividends. The break point for joint filers is $65,100 and Husband and Wife have no regular taxable income, so the 0% tax rate applies to all of their taxable income.
Example 2: Husband and Wife have taxable income of $65,000 in 2008, $55,000 of which is ordinary income and $10,000 of which is adjusted net capital gain consisting of qualified dividend income and the sale of stocks. The break point amount for joint filers is $65,100 and Husband and Wife's regular taxable income is $55,000, so the 0% tax rate would apply for up to $10,100 of adjusted net capital gain ($65,100 - $55,000). Because Husband and Wife's adjusted net capital gain of $10,000 is less than $10,100, all of it qualified for the 0% tax rate.
Example 3: Jon is a single taxpayer with $38,000 of taxable income in 2008, $32,000 of which is ordinary income and $6,000 of which is adjusted net capital gain consisting of qualified dividend income. For 2008, the break-point amount for single taxpayers is $32,500, and John's regular taxable income is $32,000, so the 0% tax rate applies to only $550 of his qualified dividend income ($32,550 - $32,000). The $5,450 balance of his qualified dividend income ($6,000 - $550) is taxed at 15%.
Example 4: For 2008, Husband and Wife have adjusted gross income (AGI) of $255,000, consisting of $115,000 of wages, plus $140,000 of adjusted net capital gain consisting of long-term capital gain from the sale of stock. For 2008, the Fords claim a total of $95,000 in personal exemptions and itemized deductions for real estate taxes, mortgage interest, and charitable donations, resulting in taxable income for the year of $160,000 ($255,0000 AGI - $95,000 in deductions). The 0% tax rate applies to $45,100 of Husband and Wife's adjusted net capital gain, which is the $65,100 break-point amount for joint filers for 2008, minus their $20,000 of regular taxable income ($160,000 taxable income minus $140,000 of adjusted net capital gain). The $94,900 balance of Husband and Wife's adjusted net capital gain ($140,000 - $45,100) is taxed at 15%.
Children Subject to Kiddie Tax Do Not Qualify
For 2008, a child subject to the "Kiddie Tax" pays tax at his or her parents' highest marginal rate on the child's unearned income over $1,800 if that tax is higher than the tax the child would otherwise pay on it. IRC 1(g). Under stricter rules that apply beginning in 2008, a child is subject to the Kiddie Tax if he or she has not attained age 18 before the close of the tax year or is between the ages of 18 and 24 and is a full time student and his or her earned income does not exceed one-half of the amount of his or her support. IRC 1(g)(2)(A)
Intended Beneficiaries
Retirees are the intended beneficiaries of the legislation behind the reduced capital gains rate. Low-income workers could qualify, but generally do not earn adjusted net capital gains. The reduction of the capital gains rate to 0% in 2008, 2009 and 2010 is pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003 and extended by the Tax Increase Prevention and Reconciliation Act of 2005. These rates will sunset and revert to the pre-2001 rates of 15%, 28%, 31%, 36% and 29.6% in 2011.
The information in this article is not, nor is it intended to be, legal advice. This article is for informational purposes only and may or may not apply to you. You should consult an attorney for advice regarding your particular circumstances. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.
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