New capital gains rate: zero |
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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 $1,800, those earnings are taxed not at the child's lower rate, but at the parents' top tax rate. So if mom and dad 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.
"I have a client whose daughter is just out of college, has her first job and is in the 15 percent tax bracket," says DeVine. "She has some funds that have had great appreciation and this is a great chance for her to grab some appreciation, diversify her portfolio and exchange to some funds that are performing better. This really benefits younger, pre-professional working adults."
Harrison-Suits agrees: "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."
Limited time offer
And speaking of time, several factors raise questions about whether the zero-percent rate will last beyond 2010 or even past this year.
The rate took effect this Jan. 1 and is scheduled to run through 2010. On Jan. 1, 2011, all the capital gains rates will go back to the 2003 levels -- 10 percent for individuals in the 10 percent and 15 percent income brackets and 20 percent for all other taxpayers.
But Harrison-Suits says she's heard talk that the zero rate could be revoked in 2009.
"It's great for 2008 because we know nothing's going to happen with it," she says. "But there's no guarantee that it's going to be there in 2009 and beyond. We have a new set of legislators coming in and a huge deficit we have to deal with, so who knows?"
Her advice? Take advantage of the zero capital gains rate while you can.
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