Cut Your Capital Gains Tax Bill

An IRS provision that kicks in next January could allow even higher income Americans to cut their capital gains tax bill to zero. Beginning in 2008, the tax rate on long-term capital gains from sales of stocks, mutual funds, and other securities will drop to zero for people in the two lowest ordinary income brackets, The Wall Street Journal reports.

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But the brackets are determined by taxable income, so many people with higher incomes could take advantage of the provision if they sufficiently reduce their taxable income through deductions such as mortgage interest, charitable donations, or tax-deferred accounts such as 401(k) plans.

They can also lower their taxable income by making gifts of stocks and other securities that have increased in value to low-income family members, including young-adult children, grandchildren, and parents, the Journal notes.

For 2007, a couple filing jointly can earn up to $63,700 and still remain in the 15 percent tax bracket, and thereby qualify for the zero percent capital gains rate.

The zero percent rate was part of the 2003 tax act passed by Congress, which capped the long-term capital gains rate at 15 percent. The rates are set to expire after 2010 unless Congress acts to extend them. The Journal cautions that it's best to check with a financial adviser before making a large transfer of stocks or other securities to lower taxable income.

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