Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: I have a client in a low tax bracket who is about to recognize a substantial long term capital gain. How will the gain be taxed for federal income tax purposes?
Answer: The capital gains tax rate is determined by adding together all taxable income (including capital gains income). The taxpayer is either in the 0% or 15% capital gains bracket.
Anyone who has taxable income that puts them in the 25% or higher income tax rate will pay capital gains taxes at a rate of 15% on the part of capital gains that represents the 25% bracket. If their income, including capital gains, is still below the 25% bracket, the capital gains tax is zero.
Here are the federal income tax brackets for 2011.
Married Individuals Filing Joint Returns
and surviving spouses
| Taxable Income | Tax |
| Not over $17,000 | 10% of the taxable income |
| Over $17,000 but not over $69,000 | $1,700 plus 15% of the excess over $17,000 |
| Over $69,000 but not over $139,350 | $9,500 plus 25% of the excess over $69,000 |
| Over $139,350 but not over $212,300 | $27,087.50 plus 28% of the excess over $139,350 |
| Over $212,300 but not over $379,150 | $47,513.50 plus 33% of the excess over $212,300 |
| Over $379,150 | $102,574 plus 35% of the excess over $379,150 |
Heads of Households
| Taxable Income | Tax |
| Not over $12,150 | 10% of the taxable income |
| Over $12,150 but not over $46,250 | $1,215 plus 15% of the excess over $12,150 |
| Over $46,250 but not over $119,400 | $6,330 plus 25% of the excess over $46,250 |
| Over $119,400 but not over $193,350 | $24,617.50 plus 28% of the excess over $119,400 |
| Over $193,350 but not over $379,150 | $45,434.50 plus 33% of the excess over $193,350 |
| Over $379,150 | $106,637.50 plus 35% of the excess over $379,150 |
Unmarried Individuals
(other than Surviving Spouse and Heads of Households)
| Taxable Income | Tax |
| Not over $8,500 | 10% of the taxable income |
| Over $8,500 but not over $34,500 | $850 plus 15% of the excess over $8,500 |
| Over $34,500 but not over $83,600 | $4,750 plus 25% of the excess over $34,500 |
| Over $83,600 but not over $174,400 | $17,025 plus 28% of the excess over $83,600 |
| Over $174,400 but not over $379,150 | $42,449 plus 33% of the excess over $174,400 |
| Over $379,150 | $110,016.50 plus 35% of the excess over $379,150 |
Finally, here’s an example to clarify things. Say that your client is a single taxpayer and has $30,000 of ordinary taxable income. That’s below the $34,500 threshold before tax rates get to 25%. If she has $25,000 of long term capital gains, the first $4,500 will be taxed at 0%, and the other $20,500 will be taxed at 15%.
Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.