No capital gains due for some investors

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Compass pointing to 'gains'

You heard right. There's no capital gains tax -- nada, nothing, zilch, zero -- on the sale of assets held for more than a year.

But you might not have heard the full story.

Bob D. Scharin, senior tax analyst from the tax and accounting business of Thomson Reuters, calls the law that was made a permanent part of the tax code Jan. 2, 2013, "the ultimate tax rate reduction." But as is often the case with tax provisions, this modification comes loaded with restrictions.

First, the elimination of capital gains tax applies only to assets owned for more than a year. Short-term sales remain taxed at your ordinary tax rate.

Then there is a monetary cap.

And it's not for every investor. Some young investors have been expressly excluded from the zero percent option. Others, such as Social Security recipients, could find that untaxed capital gains might mean new or additional taxes on their retirement benefits.

So before you rush to your broker to sell all your stocks and mutual funds, check out the law's finer points and how they might or might not apply to you.

Cashing in on lower capital gains taxes

Long-term capital gains taxes were first eliminated for some low- and moderate-income individuals in 2008. This zero-tax break was made a permanent part of the tax code Jan. 2, 2013, when the American Taxpayer Relief Act, or ATRA, was signed into law.

Ordinary income tax bracketLong-term capital gains rate by tax year
20072008-20122013 and beyond
25%, 28%, 33% and 35%15%15%15%

Limited to lower incomes

The first, and for most the biggest, hurdle to overcome is the earnings limit. Individuals in the two lowest tax brackets -- 10 percent and 15 percent -- can sell long-term assets and escape any capital gains taxes.

While the percentages are low, when you consider dollar terms, the amounts look a bit more feasible. The 15 percent bracket for tax year 2014 is a maximum $36,900 for a single filer; $49,400 for a head of household taxpayer; and $73,800 for a married couple filing a joint return. For the 2015 tax year, the 15 percent tax bracket tops out at $37,450 for a single filer; $50,200 for a head of household taxpayer; and $74,900 for a married couple filing a joint return.

Even if you make more than the maximum for your filing status, you still might be able to take advantage of the zero percent rate. The reason: The cutoff amounts are taxable income, not the larger adjusted gross income amount.

"People are used to having deduction phaseouts tied to adjusted gross income," says Scharin. "This one is geared to taxable income."

Taxable, not gross, income

Taxable income, that amount on which you figure how much you owe Uncle Sam, is reached by starting with your gross, or total, income and subtracting any adjustments (also known as above-the-line deductions), your deductions (either standard or itemized) and your personal exemptions.

Depending upon your deductions, your gross income could be substantially more than the income threshold, but you'd still be eligible for the zero tax rate.

For instance, for the 2014 tax year, taxable income of $73,800 for a married couple, which is the top of the joint filers' 15 percent bracket, with two children and who use the standard deduction, translates to an adjusted gross income of $102,000.

Figuring adjusted gross income

Zero percent taxable capital gains income threshold$73,800
Standard married filing jointly deduction and$12,400
Personal exemptions (4 x $3,950)+ $15,800
Adjusted gross income$102,000

And even if your total taxable income is more than the threshold amounts, you might qualify for some tax-free capital gains. "The zero percent rate does not phase out in the same way deduction phaseouts work," says Scharin. "You're looking at other income as well, and you get the zero percent capital gains rate to the extent that your other taxable income is below that threshold."


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