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CAPITAL GAINS TAX RATE INFORMATION
(Note, this information is very general and special rules apply in some instances.)

THE  CURRENT RULES

1.  If a taxpayer holds (owns) a capital asset for more than one year (1 year and a day) and then sells that asset AFTER May 5, 2003 and before January 1, 2011, the maximum capital gains tax rate that will be paid on the gain from that sale will be 15%.  (Note:  This 15% computation does not take into account the potential impact of the Alternative Minimum Tax (AMT) on the tax calculation which can increase the tax rate to 25% in certain circumstances.)

2.  If the above taxpayer is in either the 10% or 15% income tax bracket based on the taxpayer's other sources of income excluding capital gains, then the capital gains tax rate on the above sale would be only 5%.   But, see "BEWARE" below.

3.  If the above taxpayer waited and sold that capital asset in the years 2008, 2009 or 2010, and was in the 10% or the 15% income tax bracket, then for those years only, the taxpayer would pay ZERO federal income tax on the capital gain.  But, see "BEWARE" below. 

4.  The above capital gains tax rates apply to principal payments collected on installment sales made both before and after May 5, 2003.

5.  If the above capital asset was a depreciable real estate and depreciation had been claimed, the tax on the recapture of previously claimed depreciation is taxed at 25%.

6.  If the above capital asset was classified as a "collectible", then the gain is taxed at 28%.

 

*** BEWARE ***

            AND NOW THE OTHER HALF OF THE STORY.

THIS IS THE GOVERNMENT'S SMOKE AND MIRRORS AT ITS FINEST. THE 5% AND 0% RATES DO NOT APPLY TO ALL CAPITAL GAINS!

The 5% and 0% long-term capital gains rates will only apply when the total taxable income of the taxpayer(s), INCLUDING the capital gain income, does not exceed the maximum income to qualify for the 15% income tax bracket, with any gain exceeding that threshold taxed at 15%.  For the year 2005, the maximum total taxable income to remain in the 15% tax bracket was $59,400 on a joint tax return, and $29,700 for single filers.

An example will tell the sordid story.  Suppose a couple living in South Dakota (which has no state income tax) have ordinary income in 2005 of $59,400 from wages, etc., and then on December 25, 2005, they realize a marvelous $100,000 profit on the sale of an investment they owned for more than one year.  Since their $59,400 income less the standard deduction and the exemption deduction, is below the $59,400 threshold, they are in the 15% tax bracket.  Based upon the hype from the folks in Washington, the belief of these loyal taxpayers would be that that the 5% tax on the $100,000 long-term capital gain would be $5,000, leaving them $95,000 to enjoy.  WRONG!

The government does not see it that way and wants a bigger bite out of the taxpayers' apple.  Our taxing authorities will require that our unsuspecting taxpayers pay $13,360 on that gain, a tax rate of 13.36%, rather than the 5% the taxpayers anticipated.  At least it is still below the maximum capital gains rate of 15%, but not by much.  How does this tax gouging happen?

Well, remember that $59,400 threshold mentioned earlier, it comes into play when taxes are calculated.  The difference between that $59,400 maximum and our taxpayers' $59,400 of income less the standard deduction of $10,000 and less the exemption deduction of $6,400 is $16,400.  This $16,400 is the ONLY portion of the capital gain that benefits from that 5% tax rate.   The remainder of the capital gain is taxed at the 15% capital gain tax rate.  

So, we have the 5% tax of $820 on the $16,400, and then the 15% tax of $12,540 on the remaining $83,600 ($100,000 less $16,400), for a total tax of $13,360 on the gain.   Slick!

The same calculation would occur if a person, such as a child, had no other income except for capital gains.  Only the portion of the gain up to the maximum income threshold of 15% tax bracket would benefit from the lower tax rate, with the remainder taxed at 15%.

Also remember the dreaded AMT as mentioned earlier, as it can play havoc with tax projections by increasing the tax rate to 25% from 15% in some cases.

Always remember, if a tax law change sounds to good to be true, it usually is.

 

THE FOLLOWING RULES APPLY TO CAPITAL ASSET SALES OCCURRING BEFORE MAY 6, 2003, AND AFTER JANUARY 1, 2011, THE "OLD RULES, " WHICH WILL ONCE AGAIN BECOME THE NEW RULES UNLESS CONGRESS FURTHER EXTENDS THE "CURRENT RULES."

1. CAPITAL GAINS TAX RATES EFFECTIVE AFTER 1/1/1998

  1. Capital assets held more than 12 months AND less than 60
    months:
      1. If in 10% or 15% tax bracket, the maximum capital gains tax rate
          is 10%.
      2. If in 28% tax bracket or higher, the maximum capital 
          gains tax rate is 20%.
     
  2. Collectibles held more than 12 months:
      1. If in 10% or 15% tax bracket, the maximum capital gains tax rate 
          is 15%.
      2. If in 28% tax bracket or higher, the maximum capital 
          gains tax rate is 28%.

2. SPECIAL CAPITAL GAINS TAX RATES ON SALES AFTER 1/1/2001, BUT ONLY FOR ASSETS HELD FOR MORE THAN 60 MONTHS BEFORE A SALE.  THESE ARE "SUPER LONG TERM" ASSETS.
 

  1. If in the 10% or 15% tax bracket, the maximum capital gains tax 
    rate is 8%.
  2. If in the 28% tax bracket or higher, the maximum capital   
    gains tax rate is STILL 15%, UNLESS either Special Rule #1
    or Special  Rule #2 apply:
    1. SPECIAL RULE #1. If in the 28% tax bracket or higher,
       
      AND the asset was purchased before 1/1/2001,
      AND the taxpayer elects to report a gain from the 
      appreciation in the value of the asset as if the 
      asset was sold on 1/1/2001 at its fair market value 
      on that day,
      AND the taxpayer PAYS the capital gains tax at 20% in   
      2001 on the above appreciation in value as of 
      1/1/2001    
      AND the taxpayer then retains the capital asset until at least  
      1/1/2006,
      THEN   the capital gain tax rate drops from 20% to 18%  
      on a sale after 1/1/2006.
    2. SPECIAL RULE #2. If in the 28% bracket or higher,                           
      AND the asset was purchased after 1/1/2001,
      AND the taxpayer then holds the asset for more than 60 months,
      THEN   the capital gains tax rate drops from 20% to 18% on a sale after 1/1/2006.

3. A BRIEF RECAP OF THE "OLD RULES" CAPITAL GAINS TAXES

Taxpayers in either the 10% or 15% income tax bracket ONLY:
bulletAfter 1/1/2001, taxpayers will be subject to the current capital gains tax rate of 10% on assets held from 12 to 60 months, OR the 8% rate on "super long term" assets held more than 60 months.

Taxpayers in income tax brackets above 15%:
bulletCapital gains tax on assets held over 12 months will be 20%, the same as it has been since 1/1/1998, except for certain assets purchased after 1/1/2001, or on assets where the specific tax election is made as of 1/1/2001 and the tax paid at that time.
bulletThe lower 18% "super long term" capital gains rate is NOT EVER available for ANY asset acquired before 12/31/2000, UNLESS the election to report the gain in market value as of 1/1/2001 is made, AND the capital gains taxes are paid at that time on any appreciation, AND the asset is then held for another 60 months after 1/1/2001, which means 1/1/2006 is the earliest possible qualifying date.
bulletAssets purchased after 1/1/2001, which are then held for 60 months are eligible for the lower 18% "super long term" capital gains tax rate, so the earliest date a sale can qualify for the 18% rate is 1/1/2006.
 

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