A few weeks ago, I wrote about the "zero" percent tax rate on long term capital gains for individuals in the 15% tax bracket (or lower). I concluded that post by saying "a little pre-planning before year-end should be on your agenda." This "zero" rate can be of great benefit to many people, but in some situations there can be some surprise costs (bite).
Long term capital gains are entered on page 1 of the 1040 form and are included in your adjusted gross income (AGI). The "zero" percent tax is figured on page two of the 1040 form in the taxable income section. Your AGI is used in many other calculations. For example, the amount of social security that gets taxed is based on your AGI. College financial aid calculations are partly based on AGI. Some programs that benefit senior citizens such as STAR exemption and EPIC are based on AGI. So, even though it may be tempting to take a $10,000 capital gain free of tax, you need to examine the overall impact.
Young taxpayers, 18 or younger (or up to 23 if a full-time student) may be subject to "kiddie" tax rules. Under the current "kiddie" tax rules the young taxpayer can only get the "zero" percent rate if their parents qualify for the "zero" percent rate.
For most people in the 15% tax bracket this tax free opportunity is certainly worthwhile.
Some taxpayers are selling their favorite stock (which has appreciated greatly) and then buying it back to step up their basis with no tax due. The "wash sale" rules do not apply to capital gains, only to capital losses, so not an issue in this case.
So again, a little pre-planning before year-end should be on your agenda.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).
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