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Tax Announcements Zero tax rate on long-term capital gain Federal Taxes Weekly Alert, 01/17/2008, Volume 03, No. 54Beginning in 2008 and continuing through at least 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate (last year, a 5% rate applied to such income). This tax rate is helpful not only for lower-bracket individuals but also, surprisingly, for some whose top dollars are taxed well in excess of 15%. The amount of income taxed at 0% depends on the interplay between an individual's filing status, taxable income, and how much of that taxable income consists of long-term capital gain and dividends. The zero tax rate is available only for a noncorporate taxpayer who has a net capital gain and/or qualified dividend income. Simplified formula. A short-hand way to express the amount of a taxpayer's adjusted net capital gain taxed at 0% is:
Who can't benefit. Most children who are subject to the kiddie tax won't benefit from the 0% tax rate if their parents are in the higher brackets. For 2008, a child subject to the kiddie tax pays tax at his or her parents' highest marginal rate on the child's unearned income over $1,800 if that tax is higher than the tax the child would otherwise pay on it. (Code Sec. 1(g)) Under stricter rules that apply beginning this year, a child is subject to the kiddie tax if (a) he or she has not attained age 18 before the close of the tax year; or (b) is age 18, or is a full time student over age 18 but under age 24, and his or her earned income doesn't exceed one-half of the amount of their support. (Code Sec. 1(g)(2)(A)) The stricter rules were designed to discourage families from gifting appreciated stock, mutual-fund shares, and other securities to their low-income, young-adult children who (if no longer subject to the kiddie tax rules and if in one of the two lowest tax brackets) could then sell the securities tax-free under the 0% tax rate rule. The stricter kiddie tax rules eliminate the opportunity to do this in many cases. However, if the earned income of a child over age 18, or age 19-23 if a full-time student, exceeds one-half his or her support, the kiddie tax rules won't apply and he or she will be able to take advantage of the 0% rate for long term capital gains and qualified dividends. © 2008 Thomson/RIA. All rights reserved. Also see: |
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