Is The End Coming? Is The Zero Percent Tax Rate On Gains Going?

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

Review your portfolios. The zero percent tax rate on gains may be expiring.

In addition to the many benefits for the poor, the Bush tax cuts created a zero percent federal income tax on long-term capital gains and dividends for the middle class. Unless Congress takes action (and they only have about 24 House working days until year end), this zero percent advantage automatically expires December 31, 2012. So, you should get ready, just in case this happens.

Does This Benefit Apply To You?

If you are in the lower tax brackets of 10 percent or 15 percent, your long-term capital gains and qualified dividends are not taxed.

Married? With two children, and taking the standard deduction, your adjusted gross income can be up to $97,800, including the long-term gains and dividends. Your taxable income would be $70,700.

Result: You’re in the 15 percent bracket, and you qualify for the zero percent.

Head Of Household? With two children, and taking the standard deduction, your adjusted gross income can be up to $67,450, including the long-term gains and dividends. Your taxable income would be $47,350.

Result: You’re in the 15 percent bracket, and you qualify for the zero percent.

Single? With no children, and taking the standard deduction, your adjusted gross income can be up to $45,1000 including the long-term gains and dividends. Your taxable income would be $35,350.

Result: You’re in the 15 percent bracket, and you qualify for the zero percent.

Clarification: The Adjusted Gross Income (AGI) in the figure at the bottom of your form 1040, page one (1). It includes your salary (after deducting your 401(k) contribution), interest and dividends, taxable pensions, and subtracts deductions such as traditional IRA contribution, moving expenses, and alimony paid.

The Taxable Income is computed by subtracting from your AGI, your personal exemptions (you, spouse, children, other dependents) and your standard or itemized deduction (1040, page two [2], line 40).

There’s Always A ‘But’

Most states, including New York, don’t give you the same break.

And, are you collecting Social Security? Even though not taxable, the capital gains may increase the taxable portion of your Social Security.

Next

Long-Term Capital Gains: If these cuts expire, the tax will be 10 percent on most long-term capital gains, or eight percent on assets acquired before December 31, 2000, with a holding period of over five years.

Dividends: Dividends will be taxed at the increased rates of 15 percent or 28 percent, the same as your other income.

Action

Review your portfolio. Call your broker.

Is The End Coming?

Note: The Congressional House’s 24 working days are: September 19, 20, 21; October 1-5; November 13-16 and 27-30, and December 3-6 and 11-14. The holidays are Columbus Day, Veterans Day, Thanksgiving and Christmas. The rest of time is labeled: ‘No Votes,’ or ‘Constituent Work Week.’ The Senate is usually less. What does your work schedule look like?

Have a good week.

Quip: “If you don’t read the newspaper you are uninformed. If you do read the newspaper you are misinformed.” – Mark Twain

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.