The skinny on capital gains

Investors know that the long-term capital gains tax rate is attractive compared to ordinary income tax rates. But it's easy to get lost in all the rules surrounding capital gains taxes. (Okay, it's easy to get confused in general with America's byzantine tax code.)

Kiplinger Personal Finance senior editor Mary Beth Franklin gives a tutorial into capital gains taxes, touching on everything from the importance of timing to the treatment of mutual funds.

She highlights an underappreciated benefit for some taxpayers: A zero capital gains tax.

When you own a security for more than a year and then sell it the top capital gains rate is 15%. But for 2010 through 2012, Franklin notes that investors in the two lowest income tax brackets will pay no tax on their long-term capital gains and dividends.

To take advantage of the 0% capital-gains rate for 2010, your taxable income can't exceed $34,000 if you are single; $45,500 if you are a single head of household with dependents; or $68,000 if you are married filing jointly. Note that this is taxable income. That's what's left after you subtract personal exemptions -- worth $3,650 each in 2010 for you, your spouse and your dependents -- and your itemized deductions or standard deduction from your adjusted gross income.

However, thanks to the "Kiddie tax" children don't enjoy a zero capital gains..

About the author

Chris Farrell is the economics editor of Marketplace Money.

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