Currently, capital gains are at historic lows. Some taxpayers in the two lowest tax brackets could end up without any capital gains tax bill. That's right, zero capital gains for some filers.
Others will face tax rates of just 5 percent. Most investors will see their gains taxed at 15 percent. And 25 percent and 28 percent rates apply in special circumstances.
One thing all these tax levels do have in common is that they are known as long-term capital gains. This means they apply to assets that you hold for at least 366 days -- more than one year.
The tax appeal of the long-term capital gains tax rate is that it is generally much lower than what you pay on your regular income. In fact, it is a taxpayer's income level that generally determines which capital gains rate applies. And if your profit pushes you into a higher bracket, you could possibly be taxed at a combination of rates. And you could face yet another rate depending on the type of property you sell.
Zero capital gains taxes for some
On Jan. 1, 2008, the best of all possible tax rates -- zero percent -- took effect for investors in the 10 percent and 15 percent income tax brackets.
Previously these taxpayers had to pay Uncle Sam 5 percent of their long-term capital gains. Now any long-term assets they sell will be exempt from capital gains taxes.
Zero percent capital gains tax rate for 2011 taxes applies to
| Filing status | Maximum taxable income |
| Single or Married filing separately | $34,500 |
| Married filing jointly | $69,000 |
| Head of household | $46,250 |
To qualify for the zero rate, you must own the asset for more than one year before you sell it.
While lower-income individuals aren't typical investors, this tax benefit could help out folks such as retirees who have little or no taxable income. And the children of older individuals could combine the annual gift exclusion ($13,000 in 2011 and 2012) with this capital gains break and give appreciated long-term assets to their older parents.
15 percent tax rate for most
The zero percent rate is just the latest in a series of investor-friendly tax changes enacted during the George W. Bush administration. Prior to his taking office, investors whose overall income put them in the top four income tax brackets faced a long-term capital gains rate of 20 percent, while lower-income investors paid capital gains taxes of 10 percent.
Tax-law changes in May 2003, however, lowered the rates by 5 percent each, with the lower rate, as noted earlier, eventually being zeroed out in 2008. The lower rates were extended by the December 2010 tax bill through the 2012 tax year.
The changes have had the most effect on investors in the higher income ranges -- 25 percent to 35 percent tax brackets. These individuals now find their capital gains taxed at 15 percent. This lower rate also applies to some dividends that stocks and mutual funds pay account holders. When you hear "lower capital gains rate," it generally means this 15 percent level, because there are few investors with incomes low enough to qualify solely for the 5 percent, now zero percent, rate.