0% Capital Gains Extended

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Can You Benefit? Review Your Portfolio Now to See

As an educator participating in a 403(b) or 457 plan, you understand that you won't pay taxes on your investments until you start taking distributions in retirement, even if you buy and sell investments within your plan account on a regular basis. That is also the case with other tax-advantaged accounts, such as individual retirement accounts and 529 college savings plans.

However, you may also hold taxable investments outside of your 403(b), 457 or other tax-advantaged plan. If you have appreciated investments that you've held for at least a year and are considering whether or not to sell, you have an important decision to make, because capital gains taxes are due upon the sale.

Two More Years

The 2010 Tax Relief Act has extended the tax rates for most long-term capital gains and dividends at 0% for those in the lowest two income tax brackets (10% and 15%) and 15% for those in all other income tax brackets through 2012.

This means that many investors, especially moderate- and middle-income investors, may want to review their portfolios  to see if there are opportunities to take advantage of tax-free capital gains. Married couples filing joint returns with taxable income of up to $68,000 and singles with taxable income up to $34,000 will owe no tax on most long-term capital gains (profits on assets held one year or longer) this year.

When the new law expires, capital gains will be taxed at 10% for people in the lowest two income tax brackets and 20% for all others. Dividends will be taxed at the investor’s ordinary income tax rate.

Many Investors Are Eligible

If you think that your income is too high to qualify for the 0% rate, it’s important to note that the figures above are taxable income – after deductions and exemptions. In 2011, the standard deduction is $11,600 for married couples and $5,800 for singles. Personal and dependency exemptions are $3,750. So a married couple earning greater than $69,000 could still be eligible for the 0% capital gains tax rate.

Here's an example of how an educator and her spouse with three children taking the standard deduction could fare:*

Total income: $92,000
Minus standard deduction: -$11,600
Minus 5 exemptions: -$18,750
Taxable income: $61,650
Capital gains in 2010: $5,000
Capital gains tax: $0

Because their taxable income is below $69,000 and their capital gains do not push them past that limit, they will pay no federal capital gains taxes on their $5,000 gain.

Sell Only If It Makes Sense

It’s important to remember that tax considerations are only one factor in making any investment decision. Any investment transactions you make should be aligned with your overall investment strategy. An investment professional and a tax advisor can help you evaluate your holdings to see whether harvesting tax-free capital gains is right for your situation.

* This is a hypothetical example only and does not represent a specific tax situation. It does not take into account any tax credits or other deductions for which you may qualify. CTA does not give tax advice. Consult your tax advisor for information about your specific situation.