Taking Advantage of the 0% Capital Gains Tax
In 2008 to 2010, the capital gains tax rate for individuals in the 10% or 15% tax bracket will be 0% (down from 5% previously). After 2010, the rates will revert to pre-2001 rates, unless further legislation is passed. Who will benefit from this reduction?
Many parents with children in college or near college age in 2008 to 2010 were planning to gift appreciated investments to children, who could then sell them during these years and pay 0% tax on any gains. However, legislation that went into effect last year raised the age limit for application of the "kiddie tax" to all children under age 19 (previously under age 18) and to students under age 24, starting in 2008. The "kiddie tax" refers to the manner in which unearned income is taxed for children. In 2008, the first $900 of unearned income is tax free, the second $900 is taxed at the child's marginal tax rate, and any remaining unearned income is taxed at the parents' marginal tax rate.
Thus, it will be difficult for individuals with students under age 24 to take advantage of the 0% capital gains tax rate. However, if you have older children in graduate school, medical school, or law school, you may be able to sell investments and pay 0% capital gains tax. Another alternative is to make sure your student has significant earned income. If the earned income of an individual over age 17 exceeds half of his/her support, the "kiddie tax" does not apply. Scholarships are not considered for this test.
Individuals retiring in 2008 through 2010 may be in the best position to take advantage of the 0% tax bracket. With no or low salary, even high-income individuals may find themselves in the 10% or 15% tax bracket in the early years of retirement, although it may be necessary to delay benefits from pension plans and Social Security to do so. If that is the case, this would be a good opportunity to sell highly appreciated assets without incurring any taxes.