Remember, these rates are for long-term capital gains. In most cases, that means you have to hold an asset for more than a year before you sell it. If you cash it in sooner, you'll be taxed at the short-term rate, which is the same as your ordinary income tax level and could be as high as 35 percent on 2008 returns.
25 percent rate
While the 5 percent (now zero percent) and 15 percent rates have received the most attention, at least on Capitol Hill, there are several other categories of capital gains taxes.A rate of 25 percent applies to part of the gain from selling real estate you depreciated. Basically, this keeps you from getting a double tax break. The Internal Revenue Service first wants to recapture some of the tax breaks you've been getting via depreciation throughout the years. You'll have to complete the work sheet in the instructions for Schedule D to figure your gain (and tax rate) for this asset, known as Section 1250 property. More details on this type of holding and its taxation are available in IRS Publication 544, Sales and other Dispositions of Assets.
28 percent rate
Two categories of capital gains are subject to this rate: small business stock and collectibles.If you realized a gain from qualified small business stock that you held more than five years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28-percent rate. If you've already hired a tax professional to help you sort out the 25-percent rate on depreciable property, she can help you figure this tax, too. Or you can get the specifics on gains on qualified small business stock in Chapter 4 of IRS Publication 550, Investment Income and Expenses.
If your gains came from collectibles rather than a business sale, you'll still pay the 28-percent rate. This includes proceeds from the sale of a work of art, antiques, gems, stamps, coins, precious metals and even pricey wine or brandy collections.
More rate change to come?
Both the 15 percent and zero percent rates are scheduled to be in effect only through 2010. If Congress does not extend them, the rates will return to the prior 20 percent and 10 percent levels in 2011.Given the economy and the new political makeup in Washington, D.C., it is not clear how lawmakers will deal with the lower capital gains rates. They could let them run their course and expire at the end of 2010. But they also could decide to end both rates early or keep just one lower rate but not the other.
With Congress continually tweaking investment tax laws, what's an investor to do? Since most people will pay less taxes on their long-term gains thanks to the 2003/2006 laws, financial experts say to take advantage of today's lower rates when they fit into your portfolio plans.
But don't forget about the ultimate Dec. 31, 2010, deadline. And definitely keep an eye on federal tax-law writers in the interim.