Most of your clients are probably aware that the historically low, 15% maximum tax rate on long–term capital gains has been extended for the next two years. However, they may not be aware that taxpayers in the lowest two tax brackets actually benefit by paying no capital gains taxes on the sale of appreciated assets.

CAPITAL GAINS TAX

Tax bracket Short–term
<12 months
Long–term
>12 months
10%, 15% brackets Ordinary rate 0%
Other Ordinary rate 15%

The thresholds for remaining within the 15% income tax bracket and benefiting from the 0% capital gains rate are:

  • Single filers: Taxable income not over $34,500
  • Joint filers: Taxable income not over $69,000

Clients who find themselves in the lower tax brackets may benefit from selling appreciated assets to take advantage of the 0% tax rate, especially with the threat of increased taxes in the future. This also presents a planning opportunity for clients who may be considering a gift to a family member. For example, you may have a client who is going to assist a new college graduate by helping them purchase a used car. Instead of writing a check for $10,000 to the son or daughter, it might make more sense to gift $10,000 worth of appreciated stock or mutual funds. Once the gift has been completed, the son or daughter sells the stock without incurring any capital gains tax (assuming their income places them in the lowest tax brackets) and then uses the cash to purchase the vehicle. This is a very efficient use of the 0% tax rate on long–term capital gains. Taxpayers should be aware that realizing larger capital gains may actually “push” them into higher tax brackets, thus exposing a portion of those capital gains to the higher 15% tax rate.