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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
|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
|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|
(other than Surviving Spouse and Heads of Households)
|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%.
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