The extension of the so-called Bush tax cuts through 2012 means you may still qualify for the 0% federal income tax rate on long-term capital gains and dividends.
This low rate applies to long-term capital gains and qualified dividends that would otherwise fall within the bottom two federal income-tax brackets, which are 10% and 15%. While that may seem hard to achieve, it actually may be easy for many Americans, particularly retirees.
The top end of the 15% bracket is $69,000 for joint filers, $46,250 for those who use head of household filing status and $34,500 for single filers. So, if you and your spouse file jointly, have two children 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 stay within the 15% bracket. How? Because AGI reflects a number of write-offs, including any 401(k) and IRA contributions you make, moving expenses, and alimony payments, to name just a few.
AGI is also the number that comes before you subtract itemized deductions. So, if you itemize, your AGI can be even higher than the amounts listed above and keep you within the 15% tax bracket, allowing you to quality for the 0% tax rate on some long-term gains and dividends. Contact your financial advisor to determine how to take advantage of this low tax rate.
The tax and legal information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax counsel for advice and information concerning their particular circumstances.