Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
0% or 15% tax?
Posted by: lauramonty, May 30, 2009 11:36PM

I am trying to figure out how much money I am going to have to save from the sale of an investment property to pay the IRS next year - can someone help me?

2008 taxable income: $38,000 (bottom line on 1040)
Filing Status: Married filing jointly
Tax Rate 15%
2009 Long term Capital gain on investment property: $90,000

Because my "ordinary" income falls in the 15% tax bracket, is my entire $90,000 long term capital gain taxed at 0%...

Or

Do I add the $38,000 (assuming the same ordinary income in 2009) to the $90,000 to figure the income tax rate - therefore a capital gains tax rate of 15% on the entire $90,000

Or

Something else?

Thank you for any help!



Re: 0% or 15% tax?
Posted by: Herb, May 30, 2009 11:54PM
Something else.

Add the capital gain to the $38,000, to get "taxable income" of $128,000.

The first $38,000 is taxed at ordinary tax rates (10%, 15%). The amount from $38,001 to $67,900 is taxed at 0%. The remainder from $67,001 to $128,000 is taxed at 15% capital gains rate.

I don't know if the 0% LTCG rate will still be available for 2009, we might return to 5% or something else. Same with the 15% LTCG rate.

Re: 0% or 15% tax?
Posted by: Art, May 31, 2009 12:26AM
lauramonty

Make sure the "taxable income" which you call the bottom line on the 1040 is really labeled "taxable income."

The "bottom line" of page 1 of the 1040 is adjusted gross income, and it will be reduced by your deductions and exemptions before turning into "taxable income."


Re: 0% or 15% tax?
Posted by: Snargle, May 31, 2009 03:41PM
Herb: Wanna change that $67,001 to $67,901??

Re: 0% or 15% tax?
Posted by: Herb, May 31, 2009 09:52PM
$67,901 works for me :-)

Re: 0% or 15% tax?
Posted by: Alan S., June 2, 2009 11:19PM
Under current legislation, the -0- bracket remains in place for 2009 and 2010. Ironically, the 3 year window for the -0- rate applies in the midst of the second worst bear market in a century, so this provisions is not costing the Treasury any where near the projected amounts. What they got however, was far worse.

Re: 0% or 15% tax?
Posted by: Larry Wheless, December 7, 2009 07:12PM
I have been working on how to report a transaction such as this on a tax return for several hours and have not seen an illustration in your book nor any help in the 1040 instructions. I am considering realizing a capital gain for 2009, but need to compute how much will be taxed at -0-%. Help would be appreciated

Re: 0% or 15% tax?
Posted by: Art, December 7, 2009 08:11PM
Fill out the Capital Gains and Qualified Dividends Worksheet -- or similar title, the one in the Instructions for Form 1040 associated withthe Tax line, the line right after Taxable Income.

If your income is low enough, you can keep adding long-term rate income and not see any increase in tax until, Shazam!, additional long term gain income starts to increase your tax.

========= ============ =========

"Shazam," as I'm using it, does not refer to a modern musical group, and not even to a kid's TV show (though it's sort of close) or even to Gomer Pyle's favorite TV expletive.

It was the awesome word summoned by Billy and/or Mary Batson (but not their friend, paper boy Freddy Freeman) to become a super hero, accompanied by a lightning flash, and defeat the bad guys, including those with whom the U.S. was at war.

Re: 0% or 15% tax?
Posted by: kaneohe, December 8, 2009 01:13AM
Hopefully this example helps:

I find it easier to think about this in pictorial terms
Assume you have AGI less (deductions and exemptions) which equals taxable income. Call this TI.

Then take your sum of LTCG (gains and gains distributions) and Qualified Dividends. Assume for simplicity, for this example, that the sum of LTCG is positive(>0). Call this CGQD.

Subtract CGQD from TI. Call this OTI for other taxable income.

Then imagine a stacked bar consisting of CGQD sitting on top of OTI. Then draw the line representing the boundary between the 15% and 25% brackets. The part of the CGQD bar sitting above that line is taxed at 15%. The part of the CGQD bar sitting below that line is taxed at 0%.

Ex for MFJ: AGI = 85K; TI = 68K; CGQD= 68K, OTI=0 K
Assume the 15%/25% boundary is 68K. Then the stacked bar consists of a 68K bar (CGQD) stacked on 0 K bar (OTI). There is no part of CGQD sitting above that boundary. All of it sits below that boundary and there is 0 tax for CGQD and also overall. Admittedly this is an extreme example but demonstrates the complexity of trying to describe the conclusion .

A more realistic example: AGI = 95K; TI=78K; CGQD=20K;
OTI = 58K. Now the stacked bar consists of a 20K bar (CGQD) stacked on top of a 58K bar (OTI). Half of the CGQD bar sits in the 25% bracket and is taxed at 15%; the other half sits in the 15% bracket and is taxed at 0%.

It would be useful to verify these type of calculations on tax calculators or software (do a google search for tax calculator 2009; Turbotax has a nice calculator).

Re: 0% or 15% tax?
Posted by: greatday8, December 16, 2009 03:06AM
How does this 0% rule work if there are short term capital gains? Lets say a persons job has taxable income of $45,000, after deductions. Then added in short term capital gains of $50,000, giving taxable income of $95,000. Then there is long term capital gains of $15,000.

Will any of this qualify for the 0% rate?


Re: 0% or 15% tax?
Posted by: Art, December 16, 2009 03:22AM
I don't have the tax table here, and don't know how many dependency exemptions there are or filing status, but probably no zero percent gains here.

Re: 0% or 15% tax?
Posted by: gsyw, December 21, 2009 09:11AM
Sorry for jumping in, as i am still sitting in preschool in the fairmark knowledge school of tax.

"Under current legislation, the -0- bracket remains in place for 2009 and 2010"

"The first $38,000 is taxed at ordinary tax rates (10%, 15%). The amount from $38,001 to $67,900 is taxed at 0%. The remainder from $67,001 to $128,000 is taxed at 15% capital gains rate. "

Is the above stmt about 38K-67.9K taxed at 0% only applicable for LTCG only? I could not quite follow why first 38K is 10 or 15%, then between 38-67.9K is 0 rate then above 67.9K(as corrected in one of the threads) is 15%. I think the 38 is earned income therefore 10or15%, then the rest is about LTCG and not about total income (earned and nonearned anymore) right?

Reading from the threads above it seems the 0 rate for capital gain applies only to those in 10 or 15% tax bracket only??? Different set of rules for LTCG if above the 15% tax bracket.

Sorry, told u i am still in preschool. Hope u do not mind me asking without studying some more first.



Re: 0% or 15% tax?
Posted by: kaneohe, December 21, 2009 02:11PM
gsyw.......Herb was analyzing OP's situation and you are correct in your interpretation. OP situation was 38K taxable income (not crystal clear but clear enough that it was ordinary inome) topped with 90K of LTCG. I find this "stacking" a useful way to think about LTCG.
The part of the LTCG stacked on ordinary income below the dividing line between 15% & 25% brackets (67.9K) is taxed at 0%. The part of the LTCG above that dividing line is taxed at 15%. Drawing a picture of that stacked bar might help.

Re: 0% or 15% tax?
Posted by: gsyw, December 22, 2009 03:22PM
it is a good thing to know. I always thought I need LTcapital loss to net out LTCG, so to avoid the tax bite. i did not know there is this cushion. Maybe I could make some good from unemployment. 2010 unemployment income around 17K, i could sell off some investment gainer, and not have to pay tax of 50.9(67.9-17) capital gain. Buy the stock back, at least my adjusted basis of the stock is the new value and the gain (hopefully) in the future will be less a bite. Am I missing something?

Or rollover 401K, non company stock rollover to TIRA, deferred tax and penalty. Not rollover company stock, add to income the cost basis of 40K and sell some of these company stock and take 10.9 (67.8-17-40) LTCG tax free to pay for the 4K (10% penalty). Is this logic right?

Re: 0% or 15% tax?
Posted by: Alan S., December 22, 2009 11:16PM
Yes, you are on target utilizing NUA with your lump sum distribution. The early withdrawal penalty on the 40k cost basis is waived if you were at least 55 when you separated from service.

Remember that even though you may be in the -0- federal bracket for these LT gains or qualified dividends, the Sch D gains are still in your AGI. That means that any itemized deductions subject to a % of AGI offset (such as Medical or MIsc) might be scaled back and pull out of the -0- bracket. Cap gains on the excess amount would be taxed at 15%.



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