Tax Tips
Readers ask tax expert questions
Gina L. Gwozdz

Steve asks:

I am planning to sell shares of stock that I own which are currently subject to Long-Term Capital Gain treatment, as I have held them for over a year. I'm not clear on the following things:

1) How do I qualify for LTCG of 5 percent, i.e., is there an income limit?

2) Is there an even lower rate (0 percent) if I hold on to the stock longer, and if so, how much longer?

3) Is there an income limit for the lowest rate?

Answer:

To determine at what rate your capital gains will be taxed you must first compute your taxable income. Your taxable income (which is your income after taking into consideration all exemptions, deductions and adjustments) determines what tax bracket you will be paying tax in. Your tax bracket determines the Long Term Capital Gains (LTCG) rate.

The 5 percent rate on Long Term Capital Gains (LTCG) applies to the amount of LTCG that takes you to the top of the 15 percent tax bracket.

The calculation of the income limit uses the same method as the current, but the brackets, exemption and standard deduction amounts change annually due to inflation.

The following table outlines the Capital Gains Rates for 2007 on the sale of stock:
Bracket   Short-term Long-term
10%       10%           5%
15%         15%           5%
25%         25%           15%
28%         28%           15%
33%         33%           15%
35%         35%           15%

In 2008, the 15 percent Long-term rates will remain the same, but the 5 percent long-term rates will drop to 0 percent.

Then in 2009, the capital gain rates will return to the old 20 percent and 10 percent rates, and the five-year holding period rules and rates. These rates apply to both regular and AMT calculations.

The capital gains rate for collectibles was not affected by this law change and has remained at 28 percent.

Recaptured section 1250 gains have stayed at 25 percent.

Since the computation involves many calculations it is wise to have a qualified tax professional help you when you prepare your return.

Carol asks:

I am about to inherit a little over $100,000. What form do I use to report this even though it is not taxable? Can you tell me what publication covers this situation?

Answer:

An inheritance is a "gift" in that someone gave it to you and it is not taxable to you. T

here are no gift tax consequences from an inheritance that you receive from an estate. You may find IRS Tax Topic 422 helpful.

You may get a 1041 K-1 (an estates' version of a W-2 or 1099) if there is any income element to the inheritance. Actually, sometimes you will get a K-1 even if there is no income element to the inheritance. Your tax advisor will know how to properly report the K-1.

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Gina L. Gwozdz is a Bullard resident and certified public accountant. You may reach her via her web site at http://glgcpa.blogspot.com/