Financial Facts

0% Capital Gains Rate Extended Through 2012

Investors may face higher capital gains tax rates in 2013, unless new legislation is enacted. For 2008 through 2010, the Tax Increase Prevention and Reconciliation Act of 2005 set tax rates for most long-term capital gains and dividends at 0% for those in the lowest two income tax brackets and 15% for those in all other income tax brackets. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended those rates into 2011 and 2012.

This means that many investors, especially moderate- and middle-income investors, may want to review their portfolios now to see if there are opportunities to take advantage of tax-free capital gains. Married couples filing joint returns with taxable income of up to $69,000 and singles with taxable income up to $34,500 will owe no tax on most long-term capital gains (profits on assets held one year or longer) this year.

Many Investors Are Eligible

If you think that your income is too high to qualify for the 0% rate, it’s important to note that the figures above are taxable income – after deductions and exemptions. In 2011, the standard deduction is $11,600 for married couples and $5,800 for singles. Personal and dependency exemptions are $3,700. So a married couple with two children taking the standard deduction could earn up to $95,400 this year and still fall within the 15% income bracket, making them eligible for the 0% capital gains rate. ($95,400 minus the standard deduction of $11,600 and minus exemptions for four family members at $3,700 each comes to $69,000.) If you are eligible for any of the many tax credits available this year, an even higher income could still qualify.

In 2013, capital gains will be taxed at 10% for people in the lowest two income tax brackets and 20% for all others. Dividends will be taxed at the investor’s ordinary income tax rate.

Add Up the Savings

Selling significantly appreciated assets without paying capital gains taxes this year can mean substantial tax savings. For instance, if you meet the income requirements and sell a $20,000 investment this year that you purchased years earlier for $10,000, you could keep the entire $20,000. If instead, you wait until next year to make the same sale (and are still in the same tax bracket), you will owe $1,000 of your proceeds to Uncle Sam.

It’s important to remember that tax considerations are only one factor in making any investment decision. Any investment transactions you make should be aligned with your overall investment strategy.

This financial institution does not give tax advice. Consult your tax advisor for information about your specific situation.


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