taxes

No capital gains due for some investors

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, 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.

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