Capital gains rates more favorable for 2008?

[two4theroad]

Quoting Nords from another post
:
There's nothing wrong with tweaking your portfolio now-- or leaving it for later to take advantage of 2008's favorable cap gains rates.


Just what are the details of the favorable capital gains rate changes that will take effect in 2008? I have considerable changes to make in our portfolio regarding company stock and wonder if this should influence my timing. We intend to do NUA and then convert company stock to other after tax investments as taxing situation allows. My theory was the sooner we divest of an overabundance of company stock the better but the taxes are going to be horrendous and any tax help from UNCLE would be appreciated.

 

[MasterBlaster]

It's not that the 2008 capital gains rate is lower than last year. It's that the current 15% (max) capital gains rate is due to expire at the end of 2010.

So the advice is take it when you can if it makes sense.

 

[justin]

It's not that the 2008 capital gains rate is lower than last year. It's that the current 15% (max) capital gains rate is due to expire at the end of 2010.

So the advice is take it when you can if it makes sense.

Wait, I thought if one was in the 10-15% bracket based on ordinary income, then during 2008-2010, the tax rate on long term cap gains drops to zero for CG amounts up to the top of the 15% ordinary income tax bracket. Has this changed?

I'm planning on using the zero % rate the next couple years to radically alter my portfolio (I'm in the 15% bracket).

 

[MasterBlaster]

Justin:

You are correct and I stand corrected, the capital gains rate drops to 0 in 2008 for those in the lower income tax brackets.

However, the zero rate only applies to income plus capital gains below the 15% income tax threshold. So the amount of zero percent tax rate capital gains that can be realized is limited.

 

[justin]

Will net capital losses still offset ordinary income (up to $3000) during the 2008-2010 period?

 

[MasterBlaster]

Justin:

I would have to do some research on that question.

If I were to guess, I would say that (short term) capital losses will still be able to offset ordinary income during the 2008-2010 period.

 

[chinaco]

It's not that the 2008 capital gains rate is lower than last year. It's that the current 15% (max) capital gains rate is due to expire at the end of 2010.

Is congress planning to extend the low LT cap gain rate?

 

[MasterBlaster]

Is congress planning to extend the low LT cap gain rate?

Are you kidding ? There is no chance at all of that happening.

The new congress wants to take away all of the recent tax cuts and even raise them through the stealth AMT tax. After all you are rich and we want you to pay your "fair share".

 

[FIRE'd@51]

For an ER with no earned income (i.e. no pension or SS), the amount could be substantial. And remember, from 2008-2010 the zero rate also applies to qualified dividends (this would be most corporate dividends other than REIT's). In 2007, the top of the 15% bracket on a joint return is 63.7K, and this goes up with inflation. Adding the 10.7K standard deduction and 2 individual exemptions, another 6.8K, means a couple could actually have 63.7+10.7+6.8 = 81.2K (in 2007 dollars) of "tax-free" income at the Federal level, so long as all of their income comes from LT cap gains/dividends. Of course, with itemized deductions it could be more. Additional LT cap gains/qualified dividends would be taxed at 15%. As MB says, other non-LT cap gains/div income would push the cap gain/dividends income into the next bracket, where it would be taxed at 15%.

The favorable tax rates are set to end after 2010. I think we can definitely count on 2008 (Bush would likely veto any attempt to change that). If the Dems win the Presidency in 2008, and control both houses of Congress, I think it is quite possible that they would attempt to pass laws that would eliminate the favorable tax treatment of divs/cap gains. If they actually do what they say (and not raise taxes on the middle class), they could extend the favorable rates for the 10% and 15% brackets, but I think this is probably unlikely, since they also want to fix the AMT and will need to get funds from somewhere.

 

[MasterBlaster]

regarding Capital Gains rates and rates on interest income, it should be noted that the new congress need do nothing to raise them. The favorable rates we have now are set to expire after 2010 and revert to the 2002 (the previous-higher) rates.

So unless congress and the president actively legislate lower rates then taxes are set to rise after 2010.

The chances of congress passing legislation keeping rates low is pretty slim in my opinion.

 

[wabmester]

The chances of congress passing legislation keeping rates low is pretty slim in my opinion.

I haven't been paying much attention, but the debate about tax changes in congress seems to be about the Blue Team going for increasing marginal rates on the rich vs the Red Team shooting for broad-based elimination of deductions (like sales tax).

So far, I don't think anybody is talking about increasing cap gains tax rates.

 

[d]

So far, I don't think anybody is talking about increasing cap gains tax rates

1) doesn't mean it won't happen
2) give 'em time

 

[samclem]

So far, I don't think anybody is talking about increasing cap gains tax rates.

As noted, they won't officially be taking any action to increase them. They increase automatically in 2010. I think it is very likely that will happen. I also think that people may begin to sell securities to take advantage of the lower rates, which will depress prices. Once the selling starts, it could be ugly. So, a dirty market timer (DMT) or political effects prognosticator (PEP) might want to sell securities now to take advantage of the lower cap gains rates, then maybe buy more if the dive occurs. An efficient market theory (EMT) advocate would say all this stuff is already included in stock prices.

 

[W2R]

As noted, they won't officially be taking any action to increase them. They increase automatically in 2010. I think it is very likely that will happen. I also think that people may begin to sell securities to take advantage of the lower rates, which will depress prices. Once the selling starts, it could be ugly.

This is an unsettling scenario for those of us planning to retire in 2010. (sigh)

 

[FIRE'd@51]

So far, I don't think anybody is talking about increasing cap gains tax rates.

Remember, they automatically go back up in 2011 to the 2002 rates - so an increase is the default. Do you mean nobody is talking about raising them before 2010? I'm not sure this is correct, but I hope you are right. I can do a lot more rebalancing between now and 2011.

 

[Nords]

Speaking of lower cap gains rates, has anyone found a good website summary of the situation? A calculator or other analysis tools would be a pleasant surprise. My posts on this have been cobbled together from bits & pieces found on Fidelity & other places, and I couldn't find much on Fairmark.com at all.

This is an unsettling scenario for those of us planning to retire in 2010. (sigh)

It's also a pretty scary scenario for those with heir hoping to inherit in 2010...

 

[gandalf42]

It's also a pretty scary scenario for those with heir hoping to inherit in 2010...

Just tell them you're leaving it all to The Flat Earth Society.

Hmm..perhaps not, they might just kill you anyway!

 

[teejayevans]

This is an unsettling scenario for those of us planning to retire in 2010. (sigh)

Yes, people might sell to take some money off the table, but this only applies to long term
capital gains, and most likely the money would just get put back in, so transactions will be
up, but it will end up being a wash, of course it could take a few years for that to happen
if there is a recession in 2008-2010 time frame. Think LONG term.
Tom

 

[FIRE'd@51]

IMO, the end of the low rates on dividends could hurt more. After 2010, LT cap gains will still be maxed out at 20%, but dividends will go back to being taxed as ordinary income.

 

[lazyday]

anyone found a good website summary of the situation? A calculator or other analysis tools would be a pleasant surprise. My posts on this have been cobbled together from bits & pieces found on Fidelity....

You probably already have this handy table from Fido: http://personal.fidelity.com/planning/tax/pdf/fidmatrix.pdf

There may have been a change in AMT after the last update.

I've seen a summary of info on standard deductions, exemptions, and tax brackets on Fairmark, for current year. But haven't run into much on future rates for cap gains.

 

[audreyh1]

Nice tax chart - thanks!

Boy, things really go backwards in 2011.

Audrey

 

[justin]

You probably already have this handy table from Fido: http://personal.fidelity.com/planning/tax/pdf/fidmatrix.pdf

I just realized that I'm going to get tax-screwed in 2011. As a member of the married with 2 kids, upper end of the 15% bracket tax payer, I'll be paying thousands more in taxes in 2011. The marriage penalty is reinstated (which means I'll probably end up in the 28% bracket, and I'm getting a smaller standard deduction). The child tax credit gets cut in half to $500 (x 2 kids, maybe 3 kids by 2011). On top of that dividends and cap gains will be taxed at the former higher rate.

 

[MasterBlaster]

I just realized that I'm going to get tax-screwed in 2011. As a member of the married with 2 kids, upper end of the 15% bracket tax payer, I'll be paying thousands more in taxes in 2011. The marriage penalty is reinstated (which means I'll probably end up in the 28% bracket, and I'm getting a smaller standard deduction). The child tax credit gets cut in half to $500 (x 2 kids, maybe 3 kids by 2011). On top of that dividends and cap gains will be taxed at the former higher rate.

well yeah... but we need that money to pay for the SS and medicare of the boomers !

Thanks Justin for doing your part !

seriously though, congress will probably enact legislation to (somewhat) ease the burden on middle class families. Otherwise all of the democrats will be kicked out of office in the first election after the new tax rates take effect.

This is balanced (of course) by the growing budget problems and the looming problem of paying for the boomers entitlements. Stay tuned for the outcome...

 

[justin]

well yeah... but we need that money to pay for the SS and medicare of the boomers !
Thanks Justin for doing your part !

Hmmm... don't count your chickens before the eggs hatch! 2010-2011 happens to coincide with a period where it makes sense for me to switch career tracks to a much less demanding and lower paying job at the State. I might do that just to spite the government! Knowing that I only get to take home 57% of every dollar I make (at the margin) isn't very motivating for me to earn more and work hard. Maybe DW can quit working or we'll both go part time. Decisions, decisions...

 

[JohnEyles]

Yes, people might sell to take some money off the table, but this only applies to long term
capital gains, and most likely the money would just get put back in, so transactions will be
up, but it will end up being a wash ...

Of course, many of us make take advantage of the low rates to move out of high-expense
funds into low-expense/index ones. So, for example, I'd be moving money out of
American Funds News Perspective into Vanguard Total Int'l. If this trend is widespread,
perhaps the price of "expensive" funds goes down, but index funds wouldn't move
(since they're tied to the index). Just a thought. Maybe smart money is to have all
your ducks in a row and place your orders after you get home from New Year's Eve party