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The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
| Serving the Central Pennsylvania area since 1981 |
| Robert A. Romako, CPA |
| Zero tax on capital gains and dividends? |
Beginning in 2008 and continuing through at least 2010, a zero tax rate applies to most long-term
capital gains and qualified dividends that would normally be taxed at the 15% rate. The zero tax
rate applies to noncorporate taxpayers who have net capital gains and/or qualified dividend
income. The amount taxed at 0% depends on the interplay between an individual’s filing status,
his taxable income, and the amount of capital gains and dividends.
The official IRS explanation is quite complex, but it boils down to this formula:
Amount of net capital gains and qualified dividends taxed at 0% =
(1) the top point of the 15% bracket based on filing status (for 2008, it’s $32,550 for single,
$65,100 for joint, and $43,650 for head of household), minus
(2) taxable income net of capital gains and qualified dividends.
Let’s look at a few examples.
Illustration 1. Mr. and Mrs. X have taxable income of $65,100, consisting entirely of qualified
dividends. The amount taxed at the 0% rate equals 65,100 – (65,100 – 65,100), which yields
65,100. Thus, 100% of their income will escape taxation.
Illustration 2. Mr. and Mrs. Y have taxable income of $65,000, consisting of wage income of
$55,000 and capital gains of $10,000. The amount taxed at 0% equals 65,100 – (65,000 –
10,000), which equals $10,100. Therefore, all $10,000 of capital gains will be tax-free.
Illustration 3. Mr. and Mrs. Z have total income of $250,000, consisting of wage income of
$125,000 plus long-term gains of $125,000. Itemized deductions are $70,000. Taxable income is
therefore $180,000 (ignoring personal exemptions). The amount qualifying for the 0% rate is
65,100 – (180,000 – 125,000), so $10,100 of capital gains are taxed at 0%, and the balance of
$114,900 capital gains are taxed at 15%.
Illustration 4. Mr. S has $34,000 of wage income, plus $4,000 in dividends. The amount taxed at
0% equals
32,550 – (38,000 – 4,000), or less than zero. Here, none of the income is eligible for the 0% rate.
Also note that children subject to the kiddie tax rules are not eligible for this special tax break.
Recall that for 2008, the kiddie tax (i.e., taxing the child’s income at the parents’ rate) applies to
(1) children under the age of 18 as of December 31, 2008, and (2) children who are full-time
students under age 24 whose earned income is less than one-half of their support.
As you can see, there is a tremendous opportunity for tax savings in the right situations. The
ability to take advantage of the zero rate depends upon careful planning and knowledge of your
personal tax makeup. At the same time, investors would do well to research the amount and
timing of capital gain sales to maximize their tax avoidance each year. Call me to explore how to
take advantage of this special tax break for yourself.
capital gains and qualified dividends that would normally be taxed at the 15% rate. The zero tax
rate applies to noncorporate taxpayers who have net capital gains and/or qualified dividend
income. The amount taxed at 0% depends on the interplay between an individual’s filing status,
his taxable income, and the amount of capital gains and dividends.
The official IRS explanation is quite complex, but it boils down to this formula:
Amount of net capital gains and qualified dividends taxed at 0% =
(1) the top point of the 15% bracket based on filing status (for 2008, it’s $32,550 for single,
$65,100 for joint, and $43,650 for head of household), minus
(2) taxable income net of capital gains and qualified dividends.
Let’s look at a few examples.
Illustration 1. Mr. and Mrs. X have taxable income of $65,100, consisting entirely of qualified
dividends. The amount taxed at the 0% rate equals 65,100 – (65,100 – 65,100), which yields
65,100. Thus, 100% of their income will escape taxation.
Illustration 2. Mr. and Mrs. Y have taxable income of $65,000, consisting of wage income of
$55,000 and capital gains of $10,000. The amount taxed at 0% equals 65,100 – (65,000 –
10,000), which equals $10,100. Therefore, all $10,000 of capital gains will be tax-free.
Illustration 3. Mr. and Mrs. Z have total income of $250,000, consisting of wage income of
$125,000 plus long-term gains of $125,000. Itemized deductions are $70,000. Taxable income is
therefore $180,000 (ignoring personal exemptions). The amount qualifying for the 0% rate is
65,100 – (180,000 – 125,000), so $10,100 of capital gains are taxed at 0%, and the balance of
$114,900 capital gains are taxed at 15%.
Illustration 4. Mr. S has $34,000 of wage income, plus $4,000 in dividends. The amount taxed at
0% equals
32,550 – (38,000 – 4,000), or less than zero. Here, none of the income is eligible for the 0% rate.
Also note that children subject to the kiddie tax rules are not eligible for this special tax break.
Recall that for 2008, the kiddie tax (i.e., taxing the child’s income at the parents’ rate) applies to
(1) children under the age of 18 as of December 31, 2008, and (2) children who are full-time
students under age 24 whose earned income is less than one-half of their support.
As you can see, there is a tremendous opportunity for tax savings in the right situations. The
ability to take advantage of the zero rate depends upon careful planning and knowledge of your
personal tax makeup. At the same time, investors would do well to research the amount and
timing of capital gain sales to maximize their tax avoidance each year. Call me to explore how to
take advantage of this special tax break for yourself.
JANUARY 2008
| Robert A. Romako, CPA Phone:717.774.3047 |