Capital Gains Tax rates

Tax-Free Capital Gains Redux

Some will pay 0% capital-gains taxes on their 2009 profits.

By Mary Beth Franklin

December 4, 2009

The stock market’s rebound from its nadir in March means many investors are back in the money. And a growing number of investors may be able to cash in their profits tax-free if they sell winning assets before year-end. The 0% rate applies to long-term capital gains scored by taxpayers in the lowest two tax brackets. Likely candidates to benefit this year include retirees who don’t have to take a distribution from their IRAs this year, allowing them to hold down their taxable income, and millions of unemployed Americans who may need to tap their investments for needed cash.

The 0% capital-gains rate on investment profits and dividends for those in the 10% and 15% income-tax brackets first appeared last year, and the break is scheduled to continue through 2010. To qualify for preferential treatment for long-term capital gains, you must hold shares of your stocks or mutual funds for more than a year before selling. (This applies to assets in taxable accounts, not those in retirement accounts. Profits inside a tax shelter are not taxed when the gains are realized but are taxed at your ordinary rates upon withdrawal.) Short-term capital gains on assets held less than a year are taxed at a maximum 35%.

To take advantage of the 0% capital-gains rate this year, your taxable income can’t exceed $33,950 if you are single, $45,500 if you are a single head of household or $67,900 if you are married filing jointly. Note that taxable income is what’s left after you subtract personal exemptions — worth $3,650 each this year for you, your spouse and your dependents — and your itemized deductions or standard deduction from your adjusted gross income. (The standard deduction for 2009 is $5,700 for individuals, $8,350 for heads of household and $11,400 for married couples. Plus, there’s an added standard deduction of $1,100 per person for married people 65 or older and $1,400 for single filers 65 or older.)

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 zero capital-gains rate: children affected by the recently expanded “kiddie tax.” Dependent children younger than 19 and full-time students younger than 24 are affected by the special rule that applies their parents’ higher tax rate to their investment income in excess of $1,900 in 2009.


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