A frequently asked tax question is whether capital gains may push a taxpayer into a higher tax bracket. This article will examine some of the tax possibilities with respect to this question.
In general, capital gains are subject to the 0% or 15% capital gain rate. Generally, for 2010, if all of a taxpayer’s taxable income is within either the 10% or 15% tax brackets (and all of the net capital gains are eligible for the 10% or 15% rates), then a taxpayer’s capital gains will qualify for the 0% rate.
In order to calculate tax liability on Schedule D or on the IRS capital gains worksheet, taxable income is reduced by net capital gains and qualified dividends (other than 28% rate gain and unrecaptured Section 1250 gain), leaving ordinary income as a result. In general, capital gains (and qualified dividends) will be tax free to the extent they “fill in” the difference between ordinary income and the top-end of a taxpayer’s filing status. (See examples below). For tax year 2010, the top-end of the 15% bracket is taxable income of $34,000 for single taxpayers and married filing separately, $45,550 for heads of household, and $68,000 for married filing jointly. Thus, taxpayers will qualify for the 0% rate if none of their taxable income exceeds the top-end of their applicable filing status.
Please, note that the examples below are for illustrative purpose only and may not apply to your specific fact situation.
1). Taxpayers qualify for the 0% rate
Married filing-jointly taxpayers have ordinary income of $50,000 and net capital gain of $15,000 as their only other source of income. Because the top-end of the 15% bracket for their filing status is taxable income up to $68,000 and their ordinary income added together with their capital gain does not exceed that top-end threshold, the entire $15,000 capital gain will qualify for the 0% rate.
2). Taxpayers qualify for 0% rate on part of their capital gains, and pay at the 15% rate on the rest
Married filing jointly taxpayers have ordinary income of $60,000 and net capital gain of $20,000 as their only other source of income. Because the top-end of the 15% bracket for their filing status is taxable income up to $68,000 and their ordinary income added with their capital gain exceeds the top-end of that threshold, part of their capital gain must be paid at the 15% rate. Specifically, subtracting their ordinary income of $60,000 from the top-end of their filing status bracket of $68,000 leaves $8,000 of capital gains that can qualify for tax free rate. The remainder of their capital gain will be taxed at 15%.
3). Taxpayers do not qualify for the 0% rate
Married filing jointly taxpayers have ordinary income of $75,000 and net capital gain of $5,000 as their only other source of income. Because their ordinary income exceeds the top-end of the 15% bracket for their filing status ($68,000), none of their capital gain will qualify for the special 0% rate. Instead the entire capital gain will be taxed at the 15% rate.
Note that these are the general rules relating to capital gains and tax brackets, but other rules and factors may apply under applicable circumstances. For example, if Section 1250 unrecaptured gain property or capital gains taxed at the 28% rates are involved, the general rules will not apply. Also, deductions and various phaseouts may still be limited even if the taxpayer qualifies for the 0% rate. Additionally, there may be state capital gains tax rates that apply even if the federal rate is 0%.
Therefore, do not try to rely on your own opinion to resolve your capital gains tax questions. Rather, you should review your specific situation with a tax attorney who will help you deal with these complex tax issues.
Contact Sherayzen Law Office to Get Capital Gains Tax Help
Do you have further questions regarding your capital gains and tax liabilities? Contact Sherayzen Law Office at (952) 500-8159 to discuss your tax situation with an experienced tax attorney.