Long Term Capital Gains Tax to Have a 0% Rate for Two More Years.
The tax cut extender bill signed by President Obama contains a provision to extend the Bush Era tax cut on long term capital gains that includes a zero percent (0%) tax rate for long term capital gains for certain taxpayers. This will apply to 2010, 2011 and 2012 tax years.
A capital gain results when you sell certain assets for more than what you paid for it. The most commonly known capital assets are stocks, bonds and mutual funds. The IRS loosely defines capital assets as almost everything you own for personal purposes, pleasure or investment is a capital asset.
The IRS has many capital gains tax rates for different capital assets. Stocks, bonds, mutual funds held in a brokerage account are where I see the zero percent rate apply. If you have gains from collectibles, certain qualified small business stock (Section 1202) and unrecaptured gains (Section 1250) the zero percent rate does not apply. See the links below.
The term holding period refers to the length of time you owned the capital asset. The IRS provides the following guidance to compute the number of days of a holding period: to figure the holding period, begin counting on the day after you received the property and include the day you disposed of the property. You will use the number of days below.
Your holding period was one year or less.
Your holding period was greater than one year. Now here is an interesting tidbit following the guidance about counting holding period from the IRS: Greater than one year means one year and one day. Additionally, you do not count the date of purchase but include the date of sale or disposition. So in counting the days from purchase to sale / disposition you get one year and two days.
So How Do You Get the Zero Percent Long Term Capital Gains Tax Rate?
If we ignore capital gain income and your taxable income (on ordinary income) is such that you are in the 10% or 15% percent marginal rate, then the long term capital gains tax rate will be zero.
Some data points on the 10% and 15% marginal rates:
Filing Status Ordinary Taxable Income Marginal Rate
Single $0 – $8,375 10%
Single $8,375 – $34,000 15%
Married Filing Joint $0 – $16,750 10%
Married Filing Joint $16,750 – $68,000 15%
I saw long term capital gains taxed at the zero percent rate a lot more than I thought I would preparing 2009 income tax returns. Generally, retired taxpayers or younger taxpayers who had low ordinary income due to the economy and long term capital gains were the taxpayers I saw getting this benefit.
Publication 17 (has a great example of the zero percent tax rate)
Form 6251 (AMT Form)
IRS Topic 409 – Capital Gains and Losses: