Capital gains rate starts at zero in 2008.

You already know the federal tax rate on capital gains varies, depending on your tax bracket, the kind of property you sell, and how long you owned it.

But are you aware that starting next year some capital gains won’t be taxed at all?

From 2008 through 2010, if your taxable income falls within the 10% or 15% tax brackets, the rate you’ll pay on your federal return for certain dividends and long-term capital gains will be zero.

The zero rate generally applies to gains on sales of assets such as stocks, bonds, and mutual funds that you owned longer than a year. Qualified dividends, which include dividends on most US stocks, are also eligible.

Note: Gains on sales of assets you owned for twelve months or less are still taxed at your ordinary income rate. Depreciation recapture and sales of collectibles remain subject to higher rates as well.

Though the zero percent break becomes effective January 1, you can start planning now. For instance, it may be beneficial to wait until 2008 to sell appreciated stocks in taxable investment accounts.

In addition, since expanded kiddie tax rules go into effect in January, it’s a good idea to review gifting plans before year end. Why? The new rules mean the investment income of your age 19 and younger dependent children (under age 24 for students) might be taxed at your rate in 2008. Preparing in advance can save tax dollars.

Other planning opportunities exist. Please contact us for more information.

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About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has owned his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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