What are the 2008 rules for capital gains?

Tax News You Can Use . . .

Code Section 179 expensing limits remain the same.....for now.

Taxpayers can elect to deduct the cost of qualified property placed in service in any given tax year under Code Section 179. Qualified property is tangible, depreciable personal property that is actively used in a trade or business.

In 2010, as in 2008 and 2009, taxpayers will be able to expense up to $250,000 of qualified property placed in service in 2010 under Code section 179. The $250,000 amount is phased out (reduced) if the total cost of the qualifying property placed in service during 2010 exceeds $800,000. Once the cost of the qualified property exceeds $1,050,000 the deduction phases out completely. The amounts for the deduction and phase out are not adjusted for inflation.

As the law stands now, for years beginning after 2010, the maximum expense amount under Code Section 179 will be $25,000 with the phase out beginning at $200,000.

If you have any questions regarding the expense amounts allowed under Code Section 179, please call us at any time.

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The amount of income subject to the -0- percent depends upon your filing status, amount of taxable income, and your amount of “net capital gain” and/or qualified dividends. Net capital gain for the purpose of the -0- percent tax rate does not include gain on collectibles subject to the 28% tax, Section 1202 gain or to unrecaptured Section 1250 gain. Thus, net capital gain for purposes of the -0- rate is reduced by all three of these types of gain.

The next tier of the calculation is that the top level of the 15% tax bracket for 2008 marks the maximum amount of adjusted net capital gain. This is not to be confused with the level of taxable income of the taxpayer. The maximum levels of adjusted net capital gain for 2008 are as follows:

$32,500 for Single and Married Filing Separate
$65,100 for Joint Returns
$43,650 for Head of Household

The basic formula for the -0- percent tax is the “break-point” amount less taxable income (reduced by the adjusted net capital gain).

Phew! What does this mean? Several examples will illustrate how this zero percent tax works:

Jane is single with $30,000 taxable income in 2008, with adjusted gross income made up of $35,000 ordinary income, and $5,000 qualified dividends. The “break-point” amount here is $32,500. So, the formula for the -0- percent tax is $32,500 less $25,000 ($30,000 reduced by $5,000). Here, the full $5,000 qualifies for the -0- percent tax.

In the second example, you can see how the -0- percent tax begins to disappear. Remember that this is not just because of taxable income.

John is single with $40,000 of taxable income in 2008. He has adjusted gross income of $50,000 ordinary income, and $5,000 qualified dividends. Once again the “break-point is $32,500. So, the formula for the -0- percent tax is $32,500 less $35,000 ($40,000 reduced by $5,000). Here, none of the qualified dividends qualify for the -0- percent tax.

A third example is as follows:

A couple files a joint return for 2008. They have adjusted gross income of $200,000, consisting of $90,000 ordinary income and the balance is long-term capital gains and qualified dividends of $110,000. Their taxable income is $170,000. The -0- percent rate applies to $5,100 as follows: $65,100 “break-point” amount less $60,000 ($170,000 reduced by $110,000).

While the -0- percent tax does open some planning alternatives, it will be interesting to see whether this provision will be affected by any 2008 legislation.

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