New zero tax rate for capital gains and dividends

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May 17, 2008

By David Compton / guest columnist The Meridian Star Sat May 17, 2008, 11:43 PM CDT

That’s not a misprint. Starting in 2008 and continuing through 2010, certain lower-bracket taxpayers will pay zero taxes on long-term capital gains and qualified dividends. In order to avail yourself of the new zero rate, your taxable income can’t exceed the normal 15% rate ($65,100 in 2008 for married taxpayers filing jointly and $32,550 for single filers). However, be aware that the new zero rates may not apply to dependents that are under age 19, or under age 24 if they are full-time students. But the new law certainly doesn’t prohibit you from shifting high capital gain assets to parents or other low-taxed family members so they can take advantage of the new zero tax on such gains.

Before dismissing the income limitations as too low for your tax situation, remember that you may be able to adjust your 2008 taxable income in order to move you into the zero rate “sweet spot.” Consider increasing your deferred compensation at your place of employment. You might also consider increasing your charitable contributions, thereby reducing your taxable income. You might also prepay state and/or local income taxes. With planning, you might get your income to the appropriate level.

Remember that these new rates also apply to mutual fund shares that throw off capital gains and qualified dividends. They are not just for taxpayers holding actual shares of stock. Review your portfolio and determine which assets have potential long-term gains and qualified dividends. When possible, carry assets long-term for a potential tax break, and consider substituting investments in non-dividend-paying stock for dividend-paying stock. A zero tax rate could be your reward.

David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.

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