No capital gains due for some investors

For example, consider a married couple with $75,000 taxable income, with $65,000 of that from wages and $10,000 from capital gains. Although their total taxable income exceeds their $73,800 limit, they pay no tax on $8,800 of the capital gains. That's the amount by which the taxable threshold exceeds their income that's subject to ordinary tax rates. And the excess $1,200 in capital gains would be taxed at 15 percent, the regular capital gains rate for taxpayers in the 25 percent tax bracket.

While basing the cutoff on taxable instead of adjusted gross income means more investors should be able to take advantage of the no-tax law, practically speaking, the change might not have that much of an effect.

"People at more moderate income brackets tend not to have a lot of capital gains," Scharin says. "They may have a mutual fund that paid out a little during the year."

In fact, many zero-rate eligible individuals tend to invest primarily in tax-deferred retirement accounts, such as traditional individual retirement accounts or 401(k)s. In these cases, the elimination of the capital gains tax is of no use, as these holdings are taxed at ordinary income rates.

Kathy Harrison-Suits, a retired enrolled agent in Tacoma, Washington, sees a similar pattern. "Typically, what we find is people in those tax brackets are in two batches," she says. "They either have no savings and are not buying mutual funds and stocks, so it has no effect on them. Or they are retirees and pre-retirees, whose incomes have dropped and they have made investments and do have capital gains within their portfolios."

Planning possibilities and problems

For retirees, a major potential problem is that asset sales to take advantage of no capital gains taxes could actually increase their tax liability.

"There are some pitfalls," says Harrison-Suits. "Retirees drawing Social Security, when they initially figure their taxable income, may well be below the limits. But as their capital gains go up, so does the amount of Social Security that might be taxable. So we have a real tax-planning issue that has to be looked at in a lot of different ways."

"You do need to look at what it might do to the rest of your income," says Scharin. "While you might avoid the capital gains tax, it could raise your adjusted gross income and that may cause more of your Social Security benefits to be taxed or it could potentially affect other deduction phaseouts."

Keeping some kids out

While retirees might benefit from the zero capital gains rate, another group that ordinarily would seem a good fit is locked out of the no-tax option.

Young taxpayers usually are in the eligible 10 percent and 15 percent tax brackets. But a change in the kiddie tax, the law governing taxation of young investors' assets, prevents them from getting the zero percent rate.

Under the kiddie tax, if a child age 18 or younger (or up to age 23 if a full-time student) has investment income of more than $2,000 for tax year 2014 or $2,100 for tax year 2015, those earnings are taxed not at the child's lower rate, but at the parents' top tax rate. So if parents don't qualify for the zero capital gains rate, neither will their kids.

The age limit for the kiddie tax used to be lower, but Congress upped it in conjunction with the arrival of the zero percent capital gains rate. Lawmakers saw the ability of parents to shift income to their children who then could sell it and owe no tax as too big a loophole to leave in place.

Some young investors, however, still can get the tax break. For instance, a young college grad in the 15 percent tax bracket may decide to sell some assets that have appreciated and reallocate her portfolio.

"It works well for the lower-income levels, which in many cases is younger people just getting started. If they have gifted or inherited stock, this is a good time to look at selling," says Harrison-Suits.


Show Bankrate's community sharing policy
          Connect with us

Connect with us