extended the law so that it is still in effect for 2011 and isn't scheduled to expire till after 2012. Many people will
be able to take advantage of the 0% capital tax rate. Of course, that is assuming that congress doesn't change
the rules again in the meantime. Since we know that happens quite frequently, (there were 7 tax laws passed
between July 2007 and July 2008), it is best that people take advantage of this tax law as soon as and to as
great an extent as they can as soon as they can and as often as they can. The way it works and how and who
it will work for is what follows next.
If you are married and filing jointly and your total taxable income is less than $83,000, or if you are single and
your total income is less than $41,300, then you will be able to take advantage of this temporary tax break.
If your money is positioned in such a way that you can control where your taxable income comes from then if
you are married filing jointly, you can literally bring in $83,000 of income tax free over the next two years. Now
most people can't quite accomplish this task because too much of their income comes from pensions, but most
people should be able to bring in tens of thousands of capital gains in tax free because of this law.
Allow me to show you how this works and then give you a few tips on how to best make it work for you. If you are
in the 15% tax bracket then your capital gains tax rate will be 0%. For a couple filing joint, the 15% tax bracket
extends all the way to $65,100. That number is for taxable income NOT total income.
Then we add to the $65,100 at minimum, the standard deduction of $10,900 plus the two personal exemptions
of $3,500 each ($7,000) thereby ending up with the $83,000. ($65,100 + $10,900 + $7,000).
So as an example if you have:
$50,000 of other income (not counting the capital gains)
plus $33,000 of capital gains
$83,000 total income
less $17,900 personal exemption and standard deduction
$65,100 total taxable income (the top of the 15% tax bracket)
less $33,000 the capital gains which will not be taxed at all
$32,100 this is the only amount that you would have to pay tax on.
There are only 4 exceptions of capital gains that are not eligible for this tax treatment and they are:
1. corporations cannot take advantage of this rule it is for idividuals only.
2. sales of collectibles
3. qualified small business stock
4. recaptured depreciation (from rental properties or other "listed" property
So now comes the creative part. There are no other restrictions, so everybody should be doing everything they
can to take maximum advantage of this huge tax break. There is nothing in the rules that says you can't sell an
asset such as a stock or mutual fund, take the tax free gain and then re-buy the exact same investment back
the very next day. That way you are basically getting a double tax break. For one you get to capture your gain
tax free, but just as importantly, you get to now reset your basis in that investment. So the next time you sell
that investment you will have a lot less gain that is taxed.
There are also ways that you can maximize the amount of the gain that you can bring in tax free, such as: If you
normally take more than your required minimum distribution, you could take just the minimum for a couple of
years allowing for more capital gain income. Also you could maximize deductions to get over the standard
deduction or do inevitable repairs or upgrades to a rental unit or if you own a small business you can buy
equipment now that you know will be needing in the near future.
Of course the other way you can reduce taxable income is to put some of your assets into tax deferred
instruments thereby reducing your current income. As luck would have it one of the company's that we
represent has just introduced a 3 year annuity that is paying a guaranteed 5% for the 3 years and then you can
cash it out and reinvest it back to where it was, thereby allowing you to take advantage of this tax law for the
next 3 years. The bottom line is if you are sitting on gains in property, rental properties, 2nd homes, stocks,
bonds or mutual funds, you need to be working with an expert to make sure you take maximum advantage of
this tax break.
If you have questions or need help figuring how you can best take advantage of this tax law change then please
take advantage of my 1/2 hour free consultation. You can contact me through the contact us page on this
website or feel free to just give us a call.