Take Advantage of the Temporary Capital Gains Tax Break
For the years 2008 to 2010, taxpayers in the 10 and 15 percent tax brackets pay zero percent in capital gains taxes. This means that those in the two lowest tax brackets can sell stocks, bonds, real estate and other assets without paying any capital gains taxes. Some timely tax planning can make this break useful for low-income family members.
Overall Capital gains rate Tax Bracket
2007 2008 2009 2010 2011*
10% 5% 0% 0% 0% 10%
15% 5% 0% 0% 0% 10%
25%-35% 15% 15% 15% 15% 20%
* Capital gains rate reverts to pre-2003 levels unless Congress extends the
lower rates
The person taking the 0% capital gains benefit cannot be a dependent on a parent’s tax return. But, if your child is not your dependent and has a low income, this could be a perfect way to gift assets to take advantage of this tax break. Keep in mind you can only gift $12,000 per year ($24,000 if your spouse agrees) to any one person. When considering such a gift, remember it is the value of the basis that must be under this limit.
If your parents are in these lower brackets, they could use this approach as well. But be careful, by increasing your parents' income, capital gains could trigger taxes on your parent's Social Security benefits, offsetting the savings from the zero-percent capital gains rate. In addition, financial gifts to your parents could hurt their eligibility for Medicaid should they need to enter a nursing home.
Even when the income limits are met, only a portion of the gains may qualify for the zero-percent rate. That's because capital gains from the sale of stocks, mutual funds, real estate and other assets are added to a taxpayer’s income. That additional income might push them into a higher tax bracket. Talk to your tax advisor to assure everyone will get the benefits intended before making the gifts.
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