How do I qualify for the 5% long term capital gain rate?

Question

I am trying to do some tax planning prior to selling a stock I have held for a long time (over 5 years). From my understanding, long term capital gains are taxed at 15% rate unless your taxable income would otherwise put you into a lower tax bracket, in which the long term rate is then 5%. Is the gain from the sale of the tax part of the taxable income? I have a very small annual income of about $20,000, but when I sell the stock, I will have a gain of about $500,000. Will it be taxed at 15% rate or due to my low income, will it be taxed at 5%? And if I wait until 2008 (maybe 2009) will it be taxed at 0%? The tax laws are very confusing in this area. Please help me out.

Answer 1

Your long term capital gains rate will be 5% if your overall bracket would be 15% or less if the break didn't exist for the LTCG. To figure that, you would include the capital gains amount - their rate then drops to figure your actual tax.


With half a million in capital gains, your rate would be WAY over 15% so your LTCG rate would be 15%. With that much in capital gains, there's nothing you are going to do to bring your rate down much, no matter how much other income you do or don't have, unless you spread the stock sales over maybe 10 or 15 years, and by that time it's hard to tell if the LTCG rate tax break would still exist - depends on what congress does.

Answer 2

The gain from the sale is part of the taxable income. With the gain of $500,000, most of it will be taxed at 15% if you sell it all at once.

One way to stay under the cutoff for 5% is to have your taxable income at no more than the 15% level, by selling only part of the stock. For a single person, for 2007 the top of the 15% bracket is close to $32,000 taxable income. You could have approximately $40,000 of adjusted gross income and still be in the 15% bracket. Therefore, you could sell enough of the stock to have about a $20K capital gain and have it taxed at 5%.

For 2008-2010, the capital gains that were taxed at 5% will be taxed at 0%. Any capital gains over that threshold will be taxed at 15%.

These favorable rates expire in 2011.

Answer 3

Staying under 25% tax bracket will do it.

To give you an idea on what income range is under 25% would need to know your filing status. For example, for Single stay under $30651, Married Filing Jointly under $61301.

Best wishes.