Advanced Underwriting Consultants

Question of the Day – June 21

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.