The window is quickly closing for investors to sell their long-term capital gains and pay no tax in 2012. While this specific tax break applies to investors that are currently in the 10% tax bracket, many mid to high-income earning families can benefit too. Find out how.
The rising capital gains tax rate
If lawmakers don’t reach a decision on the expiring Bush-era tax cuts, long-term capital gains tax rates will rise to 10% for many investors that are currently in the 10% tax bracket and paying no capital gains tax. For your knowledge, those in the 10% tax bracket aren’t earning more than $35,350 if single and $70,700 if married filing jointly, which includes capital gains. It’s also important to note that the current zero percent capital gains tax doesn’t apply to all sales. Qualified small business stock, collectibles such as coins and art, and previously depreciated real property are taxed at higher capital gains rates, no matter your tax bracket. For everything else, such as stocks, bonds, and other investment securities, there’s currently no long-term capital gains tax if you’re in the 10% tax bracket.
How can this tax break help a high income earning family?
Those in the 15% tax bracket or higher, which means you earn more than $35,350 if single and $70,700 if married filing jointly, generally pay a 15% long-term capital gains tax. However, there are certain situations in which high income earners can get around the 15% tax. For instance, if one spouse earns a far greater income than another, they can file as married filing separately to exclude the other spouse’s income from their return. Specifically, the low income earning spouse can sell an investment with as high as $35,350 capital gain and owe no tax. Of course, when a couple files separately, they will lose other tax benefits such as a lower standard deduction and other tax breaks. Therefore, it’s likely that the long-term capital gain must be at least $10,000 for it to make sense to even consider filing separate tax returns.
If the spouse with little to no income doesn’t have any investments that have appreciated over the years, the high-income earning spouse can always transfer an asset to them. There will be some legal paperwork to complete for the transfer, but this can be an effective strategy as well.
Gifting assets to adult children
High income earning parents can also gift investments to their adult children that are low income earners. The parents may have to file a gift tax return if the gift exceeds $26,000, but their child won’t owe any taxes if the capital gain on the sale isn’t greater than the 10% income thresholds previously mentioned.
More Questions? Browse Answers or ask your capital gains tax questions online.
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