When I said that the current capital gains tax rate is 0% for some taxpayers, a reader, Colin, was shocked. He states:
I had no idea long term capital gains are presently 0%. Are you sure?
Yes, Colin, I’m sure! Let’s take a closer look at capital gains and the capital gains tax rates for 2010.
Capital Assets
The IRS has a pretty broad view on capital gains, which come from capital assets. Their definition is:
Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
Capital Gains Tax
Capital gains taxes are figured when you sell your capital assets. Here’s how it works:
Capital Gains and Losses. When you sell capital assets, if you sell it for more than you paid for it, you have a capital gain; if you sell it for less, you have a capital loss.
Reporting Capital Gains. You must report all capital gains on Schedule D, including investment or personal use property.
Deducting Capital Losses. Capital losses can be deducted on investment property, but not personal use propery. Capital losses first offset gains, then are deducted from income. The limit is $3,000 per year; you can carry forward any additional amounts to the future.
Long Term Capital Gains. Capital gains can be classified as long term capital gains if the property is held for more than one year. Long term gains will get preferential tax treatment, including the 0%.
Capital Gains Tax Exclusions. There are some exclusions, one of the most popular is your home. You can exclude $250,000 ($500,000 for couples) in capital gains on the sale of your home if you lived in it for 2 of the last 5 years.
2010 Capital Gains Tax Rate
The capital gains tax rates for 2008-2010 are:
| Tax Bracket |
Short Term Capital Gains Tax Rate |
Long Term Capital Gains Tax Rate |
| 10% |
10% |
0% |
| 15% |
15% |
0% |
| 25% |
25% |
15% |
| 28% |
28% |
15% |
| 33% |
33% |
15% |
| 35% |
35% |
15% |
0% Capital Gains Tax Rate
Obviously, you do need to be in the bottom two tax brackets to take advantage of the 0% capital gains tax rate. However, if you are close, you may want to do some careful planning and maximize some income shifting and retirement contributions to take advantage of it. Even if you don’t qualify for the 0% capital gains tax, you will still get the lower 15% capital gains tax during 2010.
2011 Capital Gains Tax Rate
The 2011 capital gains tax rates will go up if the Bush tax cuts expire in 2010. Just in case, I’m planning to take advantage of the 0% capital gains tax rate in 2010.
How does this work. If I have no earned income but cash in $250,000 in capital gains do I still get the 0% capital gains rate? Or does the $250,000 capital gains push me into the higher rate?