Many taxpayers think that the capital gains rate was cut to 20% last year. That's right, but it's only part of the story. Many investors qualify for an even lower 10% capital gains rate. How do you get this lower rate?
The 10% capital gains rate applies to taxpayers who are in the 15% marginal tax bracket (e.g. married couples and singles with taxable incomes below $41,200 and $24,650, respectively). While some taxpayers are consistently above these levels, do not overlook a chance to lower your bracket for one year to take advantage of a lower capital gains rate.
For example, I have clients living comfortably on pension and social security income. They have been in the 28% federal tax bracket for many years. Because of some recent purchase of property and new mortgage deductions, their tax bracket has dropped to 15% temporarily. While the 15% regular tax bracket applies to them, they can sell some appreciated assets and enjoy the 10% capital gains rate.
Let's say a retired couple had $60,000 of income in 1997 but they had heavy deductions that year reducing their taxable income to $30,000 (other ways to reduce taxable income: use a short term annuity or tax free bonds). Since the 15% tax bracket extends up to $41,200, they could use up to $11,200 ($41,200 minus $30,000) of capital gains and have them taxed at 10%. Another way to enjoy the 10% capital gains rate: gift stock or mutual funds to the grandchild (who is in the 15% tax bracket) and the capital gains upon sale would be taxed at only 10% to them.
This may be an opportunity to cut your gains tax in half from 20% to 10%. If you would like a tax review for 1998 so you know about opportunities before the year comes to an end, call now to schedule your tax review and bring in a copy of your 1997 tax return. There's only 9 months left to cut your 1998 tax bill!