One of the tax saving strategies I’ve been implementing this year involves long term capital gains. Currently, as long as you are in the 15% tax bracket, all long term capital gains are tax free. Since the stock markets have been rather chaotic over the past months, I decided to go ahead and take some of the gains while they would be tax free. While the rates are currently the same for 2012, with an enormous federal deficit looming, budget cuts coming from the congressional subcommittee, and ongoing chatter about raising taxes, I didn’t want to wait and hope that the law didn’t change.
Let’s run through a quick example to see how much this strategy could save you. Let’s assume a married couple filing jointly with 2 kids. Let’s also assume they both work and make 85,000 of taxable wages combined from their jobs. To keep it simple, we won’t include interest, dividends, or any above the line deductions. That means their Income is 85,000.
Standard Deduction: -11,600
Personal Exemptions: -14,800
Taxable Income: 58,600
The 15% bracket for married filing jointly goes up to $69,000 of taxable income. So, the family above could have capital gains of $10,400 tax free.
If you aren’t married, aren’t filing jointly, or don’t have kids, no worries. I’ve included instructions with links so that you can do your own calculation to see how much you could save. Just follow these steps:
- Start with your income.
- Subtract the standard deduction for your filing status.
- Subtract $3,700 for yourself and any dependents on your return.
- This number is your rough estimate of taxable income.
- Compare the number you got to the upper limit of the 15% bracket for your filing status. The difference will give you an idea how much in capital gains you can claim tax free.
If your capital gains take you higher than the 15% tax bracket, the excess capital gains would only be taxed at a 15% rate. Even if you don’t qualify for the 15% bracket, capital gains rates are scheduled to increase for all taxpayers in 2013, so taking the gains before then could be beneficial.
Any questions? Let me know in the comments below.