My plans for substantial tax savings next year, including tax-free stock dividends and long-term capital gains, revolve around one figure: $65,100.
While not official yet, $65,100 is projected to be the top of the 15 percent tax bracket for couples filing joint returns for 2008, based on how brackets are adjusted annually for inflation. For single filers, it would be $32,550. As income rises, Uncle Sam would take a progressively bigger cut (first 25 percent, then 28 percent, 33 percent and 35 percent).
That's reason enough for my wife, Georgina, and me--and all taxpayers--to try to stay within the 15 percent bracket, by contributing to deductible retirement plans, for example, and claiming legitimate deductions and adjustments to income.
But there is another incentive: From 2008 through 2010, current law calls for a zero percent rate--that's right, nada--on qualifying stock dividends and long-term capital gains on the sale of securities for taxpayers in the two lowest brackets of 10 percent and 15 percent. (Through Dec. 31, the tax rate for qualifying dividends and long-term gains in these two brackets is 5 percent.)
"Now, that's a free lunch," said Mike Swenson, certified public accountant with Thomson Tax and Accounting.
Initially effective for 2008 only, the zero percent rate was included in a 2003 law that lowered rates on dividends and long-term capital gains to a maximum 15 percent. Last year, Congress extended these lower rates through 2010. Unless the law is renewed, stock dividends will again be taxed as ordinary income in 2011 and the tax rate on long-term gains will revert to a maximum 20 percent.
The uncertainty about what Congress may do next--including repealing the lower rates before 2011--is prompting many advisers to suggest investors sitting on gains don't wait too long to sell.
Given the government deficit, "low rates for investors may disappear sooner rather than later," said Grace Allison, vice president and tax strategist for Northern Trust. Investors with large unrealized gains in concentrated portfolios (a lot of money in a few stocks) should consider selling and diversifying now, she said.
Even investors with diversified portfolios can benefit from selling, particularly if they can do it tax-free.
"While the low capital-gains rates appear safe for now, tax laws can be unpredictable," Swenson said. "The rule of thumb is to take advantage of the low rates while you can."
Tax reasons alone normally should not drive selling decisions. But in this case, you can buy the same securities right back without adverse tax consequences. (There is no "wash-sale" rule when selling at a gain, as there is when selling at a loss.) Your only concerns may be transaction costs (not a factor with true no-load mutual funds), possible fluctuations in share price between sale and repurchase, and whether your fund imposes a waiting period to buy again after you sell.
To qualify for long-term rates, securities must be held more than a year. Gains and dividends count as taxable income to determine your bracket. Next year, Georgina and I plan to sell selected no-load fund shares for solid gains but not enough to push us beyond the 15 percent bracket (and nowhere enough that the alternative minimum tax becomes an issue). We'll buy the same number of shares the same day, keeping our portfolio intact and establishing a new and higher tax basis. We'll also refrain from selling investments at a loss in taxable accounts because losses must first be used to offset gains, and the gains will be tax-free anyway.
Humberto Cruz is a columnist for Tribune Media Services. E-mail him at firstname.lastname@example.org.Copyright © 2015, The Baltimore Sun