FYI: CapGains Tax Planning Tip

[Red-y]

Most of us have heard that the low 15% rate on capital gains in the US has been extended through 2010. I hadn't heard about the item below in the mainstream or financial media until I got my July issue of "Tax Hotline".

As part of the latest tax act, The Tax Increase Prevention and Reconciliation Act of 2005, for the years 2008 through 2010, if you are in the 10% or 15% tax bracket, you pay nothing on long term capital gains or dividends.

If you will be or can put yourself in the lower tax brackets for those years, it might make sense to time the selling of appreciated assets to coincide with that window and have all your gains be tax-free.

 

[rw86347]

how many $$ per year is 15%?

 

[Red-y]

www.irs.gov is your friend. Simple search on "tax rates" takes you to http://www.irs.gov/formspubs/article/0,,id=133517,00.html

Filing single, the upper limit on the 15% bracket is $29,700 of TAXABLE income (meaning income after your exemptions and deductions have been subtracted out, not your gross income). For Married Filing Jointly, the upper limit is $59,400.

 

[rw86347]

As a bussiness owner I should consider paying myself minimum wage, and get the rest through dividends.

 

[pfpelican]

Red-y...those are 2005 rates.

For 2006, married joint is $61,300

pp

 

[Red-y]

Yep, these will continue to go up as the brackets are adjusted for inflation, so the limits will be even higher by the time we get to the 2008 tax year.

As a bussiness owner I should consider paying myself minimum wage, and get the rest through dividends.

That sounds like a good plan. Are the dividends you would take out of the business "qualified" dividends in the IRS sense? I've been moonlighting at H&R Block for the past 5 years, but all my experience is with individual returns incl. a handful of sole proprietors, no partnerships or corps.

 

[cute fuzzy bunny]

Now you know why I like stock dividends...

 

[rw86347]

Yep, these will continue to go up as the brackets are adjusted for inflation, so the limits will be even higher by the time we get to the 2008 tax year.
That sounds like a good plan. Are the dividends you would take out of the business "qualified" dividends in the IRS sense? I've been moonlighting at H&R Block for the past 5 years, but all my experience is with individual returns incl. a handful of sole proprietors, no partnerships or corps.

Not sure. Right now me and my father co-own a sub-s corp. Once we have finished depresiating our assets we have been thinking of moving it to a "c" corp, and then paying dividends. Does that make is qualified?

 

[Martha]

Not sure.  Right now me and my father co-own a sub-s corp.  Once we have finished depresiating our assets we have been thinking of moving it to a "c" corp, and then paying dividends.  Does that make is qualified?

I am confused.  The C corporation will result in double taxation, with the earnings taxed at the corporate level and then the earnings paid out in dividends taxed in your hands. 

 

[rw86347]

I think see what you are saying, although it wouldn't be double taxation.

I would get taxed 21% in the corp, simply so that I could avoid personal tax of say 10% (effective)

 

[mathjak107]

the 15% tax bracket gets raised higher and higher every year by about 1500.00 bucks or so...thats why for most i dont believe a roth is a good deal

 

[Jane_Doe]

Guys,

Can someone please tell me - Does this apply to Real Estate cap gains as well as dividends?

Thanks,

Jane

 

[lazygood4nothinbum]

wow, assuming answer to above question on real estate is yes, i could sell in 2010 instead of 2012 as originally planned, live that year on inheritance cash and save a bunch of money on the sale of this house (assuming this bubble doesn't burst by then; it which case, the tax savings are moot).

 

[Nords]

Can someone please tell me - Does this apply to Real Estate cap gains as well as dividends? 

That's pretty funny!

No.

It doesn't apply to collectibles or depreciation recapture either...

 

[Jane_Doe]

Thanks, Nords!

You burst my bubble!!

I DO appreciate the answer - was pretty sur that would be too good to be true!

Jane

 

[maddythebeagle]

Jane must be flipping houses

 

[Martha]

I'm getting confused here by some of the answers so I am doing a recap of the rules.

Long term capital gains rate and tax on qualified dividends is a maximum of 15%, at least through 2010. However, collectibles gain (metals, paintings, etc) is still at a 28% maximum. Unrecaptured Section 1250 gain (recapture of depreciation) is at 25%. So if real estate is held for more than a year, the long term capital gain rate applies EXCEPT for the depreciation recapture.

If you are in the 10 to 15% tax bracket, then as the OP says, through 2007 the long term capital gain rate and qualified dividend rate is 5% disappearing to 0% in 2008.

As another poster said, for 2006, the married filing jointly 15% tax bracket tops out at $61,300. With a standard deduction of $10,000 plus personal exemptions for $3200 each, the 15% bracket is pretty generous.

 

[Nords]

So if real estate is held for more than a year, the long term capital gain rate applies EXCEPT for the depreciation recapture. 

I'm confused by this.

I thought the profit from the sale of an investment property was reported on Schedule E, but admittedly I've never profited from selling a rental property so I've never plugged through that part of the form. If it's reported on Schedule E then I'd think that the profit would be regular income, just like the rental income left over after expenses & depreciation.

I've also been led to believe that a cap loss from the sale of a home can't be used to offset cap gains from other investments. But then again I've never had a cap loss on the sale of a home and I've never worked through the pertinent form.

Where are the rules for this?

Jane, maybe I'd better get out my crow cookbook...

 

[Martha]

Look at publication 544 for gains on sale of investment property. http://www.irs.gov/pub/irs-pdf/p544.pdf

And publication 523 for gains on sale of your home. http://www.irs.gov/pub/irs-pdf/p523.pdf

No losses allowed on sale of your home.

You report on Schedule D, not E.

 

[Nords]

Look at publication 544 for gains on sale of investment property. http://www.irs.gov/pub/irs-pdf/p544.pdf
And publication 523 for gains on sale of your home. http://www.irs.gov/pub/irs-pdf/p523.pdf
No losses allowed on sale of your home.
You report on Schedule D, not E.

Well, home-sale losses are pretty clear: "You cannot deduct a loss on the sale of property you acquired for use as your home and used as your home until the time of sale."

As for the rental property, I'm getting bogged down in the 1231 & 1250 recapture rules.

Jane, this is more complicated than I realized. Apparently in some situations you can declare cap gains and take advantage of the impending lower cap-gains tax rates...

Thanks, Martha!

 

[Red-y]

I had to dig into my old tax returns to find this...I sold a rental property in 2003.

The sale of a rental is reported on Form 4797, Sales of Business Property. After all, you're in the business of renting out your real estate to make money.

Once you figure the gain on the sale, it's carried over to Schedule D and reported as a capital gain along with your sales of securities, etc. Schedule E is for reporting income from rentals as you operate them, not when you sell them.

So I would think that lazygood4nothinbum does have a good plan to time the sale of the rental to 2010...Nords you threw me at first because I was thinking, oh that's right I did report the sale of my rental on some other form. But in the end it's treated like a capital gain just like those from stock sales.

 

[tryan]

Yup, as long as you keep the property a year you get the 15% rate (sold one last year).

BUT, you'll quickly hit the alternate minimum tax then the rest of the gain in taxed as ordinary income. OUCH! I was hit last year ... and the year before.

Flip a property in less than a year it's taxed as a short term gain.

 

[OldAgePensioner]

In figuring whether your in the 15% income bracket does the capital gain itself count as part of the income calculation.

For instance if the 15% bracket creeps up to $34,000 for single in 2008, and I earn 14,000 in income, then can I only sell $20,000 of capital gains/dividends?

 

[Martha]

Yes, the capital gains count.

 

[OldAgePensioner]

If the law truly changes in 2010 to something less attractive, will this cause a big sell off of stocks held long term? Might glitch the market a bit.