Zero-percent capital-gain tax rate available 2008 through 2010

By Gary A. Hachfeld, University of Minnesota Extension

With legislation enacted in 2003, long-term capital gain tax rates were lowered to 5 and 15 percent. The percent rate applied to capital gains and qualified dividends for taxpayers in the 10- and 15-percent federal tax brackets. The 15-percent rate applied to taxpayers in the 25-, 28-, 33- and 35-percent federal tax brackets. The 2003 legislation also included a provision for the 5- percent tax rate to be reduced to zero percent in 2008 for capital gains and certain qualified dividends for tax payers in the 10- and 15-percent federal tax bracket. With additional legislation in 2005, the zero-percent provision was extended through the 2010 tax year.

There is some confusion about this provision however. The zero-percent rate applies to the portion of capital gains that falls between the taxpayer’s ordinary income and the top of the 15-percent federal tax bracket. For 2008, the maximums for the 15-percent tax bracket are as follows: married filing jointly: $65,100; single individuals or married filing separately: $32,550; and head of household: $43,650.

As an example, Jim and Jane have 2008 ordinary income of $50,000 and file jointly. They sell their farm land and realize a capital gain of $150,000. A total of $15,100 of the capital gain would be subject to the zero-percent capital gain rate in 2008. The remaining $134,900 of gain would be taxed at the 15-percent capital gain rate.

Two additional items to keep in mind. First, beginning in 2011 the former federal capital gain tax rates of 10 percent and 20 percent return unless Congress changes the law. Second, because Jim and Jane live in Minnesota, the gain on the sale of their farm land will be subject to the Minnesota capital gain tax as well. Those rates range from 5.35 percent to 7.85 percent depending upon the amount of gain.

To take advantage of the zero-percent tax rate for 2008-2010, people can utilize a number of strategies to manage or minimize their taxable income. The bottom line is that the taxpayer needs to consult with an accountant, as well as other necessary professionals, before completing the land sale. This will enable the individual to develop and implement a sound strategy.

(Gary A. Hachfeld is an agricultural business management educator with University of Minnesota Extension.)