In the past, I have written about the 0% rate on capital gains and qualified dividends. This can't-be-beat rate expires at the end of 2012 and may not be extended, so this is probably the last chance for taxpayers to benefit from it. Here's how to take advantage of the 0% capital gains tax rate.
Identify Capital Gains
I would begin by determining whether I have capital gains that I want to take in 2012 if they qualify for the 0% rate. These would have to be long-term capital gains in taxable accounts. To qualify as long term, the stock or other capital asset must be held for more than a year. Since taxes on gains taken in nontaxable accounts, such as IRAs and many other retirement accounts are deferred, this rate doesn't apply to them. Nor does it apply to some categories of capital assets, such as collectibles.
Determine If I Qualify
If I have gains that I might want to book this year, I then would determine if I qualify for the 0% capital gains rate, because it only applies to taxpayers in the 10% and 15% tax brackets. However, this includes a lot of Americans, since those who file jointly and have taxable income of up to $70,700 qualify. Also, taxable income is income after all deductions, so, in reality, taxpayers with much higher gross income from compensation and other sources can qualify.
To figure out if I qualify for the 0% capital gains tax rate, I need to estimate my taxable income for 2012, after all deductions. The easiest way to do this is to look at my most recent 1040 and update the numbers to reflect any changes in 2012, such as a pay raise; an increase in retirement plan contributions; a change in itemized deductions or in the standard deduction, depending on which I plan to use, and so forth. I try to come up with as accurate a number as possible without spending an excessive amount of time on this exercise, since the important thing is to determine whether booking long-term capital gains in 2012 would be beneficial to me financially.
Decide How Much to Book
If I determined that I qualify for the 0% capital gains tax, I would then estimate how much I could book in capital gains before getting pushed into the 25% tax bracket. Effectively, this is the difference between the upper end of the 15% tax bracket ($70,700) and my estimated taxable income. For example, if my estimated taxable income is $60,000, I could take long-term capital gains of more than $10,000 and still qualify for the 0% rate on all those gains.
I would book these gains before yearend, then sit back and enjoy not paying taxes on them.
For taxpayers that qualify, the 0% rate also applies to qualified dividends. I didn't discuss dividends in this article because I can't control when I receive them. However, if I qualify for the 0% capital gains rate, I will also enjoy a 0% tax rate on qualified dividends that I receive in 2012.
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http://www.irs.gov/taxtopics/tc409.html, Tax Topics - Topic 409 Capital Gains and Losses
http://www.irs.gov/pub/irs-pdf/f1040es.pdf, 1040es instructions