Question: I have been told that in 2009, if my income is under $65,000, I do not have to pay capital gains tax on some stocks that I would like to sell. My husband and I make less than that, if we don't count our dividends and real estate investments. Could you please clarify the situation for me? Janet, Columbiaville, MI.
Answer: Ah, taxes. I'm sure you won't be surprised if I tell you the answer isn't simple! Most importantly--and this is not just boilerplate--you should work with a professional in figuring out your actual tax liability. But this question is coming up more and more, so here is a brief introduction. It's a tax benefit well worth knowing about for some middle class families.
Under certain circumstances between 2008 and 2010, the long-term capital gains rate for some investors will drop to zero. That's right 0%. The same goes for dividends. It's a genuine opportunity to sell some highly appreciated assets with a zero capital gain tax liability. You've heard right.
That said, don't sell your taxable portfolio just yet. (Withdrawals from a 401(k), 403(b), and comparable retirement savings plans are still taxed at your ordinary income tax rate.)
The long-term capital gains tax break is limited to those in the 10% and 15% income tax brackets (which is a lot of people, although far fewer have sizeable taxable stock, bond, and mutual fund portfolios). These folks have been paying a long-term capital gains tax rate of 5% in recent years.
Looking it up, in 2008 a single filer is in the 10% bracket with an income cutoff of $8,025. The single filer jumps into the 15% bracket after that with an income up to $32,550. The comparable 10% and 15% income bracket limits for a married couple filing jointly are $16,050 and $65,100, respectively. Of course, your actual income could be much higher. These numbers represent taxable income after deductions and exemptions.
Still, the capital gains from the sale of stocks or mutual funds are added to your income. That additional money could push you into a higher bracket. For instance, let's say you earned as a couple filing jointly $40,000 (after all deductions but before capital gains and dividends). You sell sold $20,000 worth of stocks eligible for long-term capital gains treatment. The gain would not be subject to capital taxes.
But if you earned $65,000 and sold $20,000 worth of stock, almost all the stock profit is subject to the 15% capital gains tax treatment.
This is only one example, and there are other permutations that can affect the capital gains taxes of those living on Social Security, children that want to gift stock to their parents, and so on. The capital gains tax treatment could change in a new administration, too.
The bottom line: It pays to investigate this short-term capital gains wrinkle in the tax code for anyone in the 10% and 15% tax bracket.