Do You Qualify for Tax-Free Capital Gains?

Thanks to the extension of the so-called Bush tax cuts through 2012, lots of folks still qualify for the 0% federal income tax rate on long-term capital gains and dividends. Even if your income is too high to personally take advantage, you may have children, grandchildren, or other loved ones who can benefit.

The 0% rate only applies to long-term capital gains and qualified dividends that would otherwise fall within the 10% or 15% federal income tax rate brackets (the bottom two brackets). As it turns out, one can be doing pretty well income-wise and still be within those brackets.

* Let's say you file jointly, have two dependent kids and claim the standard deduction for 2011. You could have up to $95,400 of adjusted gross income (AGI), including some long-term gains and dividends, and still be within the 15% bracket because your taxable income would be $69,000. That's the top end of the 15% bracket for joint filers.

* Or say you're divorced, use head of household filing status, have two dependent children and claim the standard deduction for 2011. You could have up to $65,850 of AGI, including some long-term gains and dividends, and still be within the 15% bracket. That's because your taxable income would be $46,250 -- the top of the 15% bracket for those who use head of household filing status.

* Say you're a single filer with no kids, and you claim the standard deduction for 2011. You could have up to $44,000 of AGI, including some long-term gains and dividends, and still be within the 15% bracket because your taxable income would be $34,500. That's the top of the 15% bracket for singles.

To put things in perspective, AGI is the number on the bottom of page 1 of your Form 1040. It reflects certain write-offs such as contributions to your 401(k) plan at work, any deductible IRA contributions, moving expenses and alimony payments to your ex. But AGI is before subtracting personal exemptions and itemized deductions (for those who itemize). If you itemize, your AGI can be even higher than the amounts listed above, and you would still be within the 15% bracket and therefore qualify for the 0% tax rate on some long-term gains and dividends.

The 0% tax rate is almost too good to be true. That said, it only applies to long-term gains and dividends that accumulate in taxable brokerage firm accounts and long-term gains from investment assets like real estate that are held outside your tax-deferred retirement accounts -- traditional IRA, 401(k) and the like.

http://www.smartmoney.com/taxes/income/who-qualifies-for-taxfree-capital-gains-1305663454772/?zone=intromessage