Large cap gain on low income client

[mjdntn]

I have a low income client (30k) that plans on taking a large long-term capital gain in 2008. Will the gain (100k) move his tax bracket upward, or will he be taxed on regular earnings at the normal rate? If you are in the 10-15% tax bracket, does the existence of a long-term capital gains push you to the 25-28% bracket because you take a once-in-a-lifetime capital gain?

I've never had anybody who makes so little have a super-sized capital gain before.

[John of PA]

Yes indeed

Yes indeed that large capital gain will bring him up into the 28% bracket (or whichever). So any other ordinary income he may have will be taxed at 28%. The 15% maximum rate on the capital gain is figured at the end after AGI and the tax bracket has already been established.

[joanmcq]

I believe the amount of capital gain that would bring the ordinary income up to the 25% bracket is taxed at 5% and the rest at 15% even though the ordinary income is taxed at the highest bracket. I went over the Sch D calculations with a fine tooth comb when I sold real estate last year and was in a similar situation...

[ED SMITH]

13%

He would owe less than $17000, which is 13% of his income. Don't forget that on sch D worksheet, the tax is figured both ways and the lower figure is the one that is used. LTCG saves him about $11500.

[DaveO]

Except that in 2008

The 5% gain will be 0%. There is an excellant discussion of this at this link.

http://www.nysscpa.org/printversions/cpaj/2006/1206/p40.htm

[thomtax]

One way that you can get a good idea of how it would affect things is to enter a fictional return into your tax software. Use the $30K W2 information from 2006 and then enter the $100K gain. This should give you a real good ballpark figure for consideration. It's not exact because it doesn't account for any law changes but will still give you an idea of what to expect.

LT

[joanmcq]

Except, of course, that the lowest LTCG rate in 2008 will be 0%. So a dummy return with 2006 software won't give a correct result. Of course, since we don't even know if there is an AMT fix for 2007, much less 2008, who knows what rates could be in effect for anything as far away as 2008? Oh wait, isn't 2008 only a month an a half away???? I stil wouldn't count on anything as far as planning goes..I'd give him a figure at 15% and figure if he owes less, you'll be a hero. And let him know why tax planning (which is what he seems to be doing) is so precarious these days due to our 'friends' in Washington...