Taking Advantage of Low (or Zero) Capital Gains Rates
In Retirement Tax Tips-Part 1 I recommended fully funding your 401(k) accounts before retiring from your job. In Retirement Tax Tips-Part 2 I discussed how converting a traditional IRA into a Roth IRA might save you some tax dollars.
In this post I want to talk about a temporary capital gains benefit you may be able to take advantage of if you are a pre-retirement-age retiree (or otherwise in a very low income tax bracket.)
I mentioned in my previous post that I would be converting my traditional IRA into a Roth IRA little by little over the next several years, managing my income within the zero or lowest tax bracket. But, I will not begin doing this until 2011, because in the meantime, I am first going to take advantage of the ZERO long-term capital gains rate currently available only for tax years 2008-2010.
Currently, long-term capital gains (gains on assets held for at least one year) are taxed at a maximum rate of 15%. For those taxpayers in the lowest two income tax brackets, however, the long-term capital gains rate is currently (for tax year 2008) ZERO. This provides an excellent opportunity for those no longer working (retired) that haven't yet reached "normal" retirement age. In these interim years without a salary keeping you in higher tax brackets (and before social security and retirement plan distributions push you back into higher tax brackets), you may be able to manage your taxable income (income less itemized deductions) within the range necessary to take advantage of these provisions.
For 2007, the cut-off for this favorable rate was $63,700 for married filing jointly ($31,850 for singles.) The 2008 brackets will be adjusted for the cost of living and are expected to be approximately $65,000 for married filing jointly (and approximately $32,500 for singles.)
So, if you have stocks or mutual funds that you must liquidate anyway over your pre-retirement-age retirement years, you may want to sell just enough in 2008 through 2010 so that your taxable income stays below these cut-offs and you can enjoy a ZERO % tax rate on these sales.
Under the current tax law, for tax years after 2010, these favorable rates are scheduled to expire and go back to their pre-2003 levels of 20% (and 10% for those in the lowest bracket). For a very good (and very detailed) resource on this and related tax rules, see this article in the CPA Journal.
Of course there is always the possibility of tax law changes after the 2008 elections and these favorable rates could be legislated away. But barring any legislative changes before 2010 you may be able to take advantage of these ZERO capital gains rates for 2008-2010 and save some tax dollars.
(Next in Tax Planning Tips-Part 4-Saving Tax Dollars by Converting A Vacation Home to a Primary Residence)