Tree Farmer - January/February 2008 - (Page 36)

Will By Hoover BILL Zero-percent Capital Gains Rate Help You? 13.2 percent, but their marginal tax rate is 25 percent. The 25 percent rate applied to the last $17,000 of taxable income. The next higher tax rate of 28 percent starts when taxable income reaches $131,450. Understanding the ordinary income tax brackets and rates allows us to deal with the capital gains tax rates. Keeping in mind that the two lowest tax brackets for ordinary income are 10 and 15 percent, the zero-percent capital gains rate applies when your taxable income, with capital gains excluded, puts you in the 10- or 15-percent tax brackets. For 2008 this means that if your taxable income without capital gains is more than $65,100, no part of your capital gains would be subject to the zero-percent capital gains. In this case, the capital gains tax rate is a straight 15 percent, making the average and marginal capital gains rates the same, as demonstrated in Example 2. Example 2. Assume that the Joneses, in Example 1, also have a net long-term capital gain of $24,000 from a timber sale. Since their marginal ordinary income tax rate is 25 percent, above the 15-percent bracket, the applicable capital gains rate is 15 percent, making the tax on the timber $3,600. The zero-percent rate applies if taxable income excluding capital gains is less than $65,100, as demonstrated in Example 3. Example 3. Assume that the Joneses’ taxable income with the $24,000 of capital gain excluded is only $42,100. This puts them in the 15-percent ordinary income tax bracket. An additional $23,000 of income is needed to move them to the next highest bracket. Thus, the first $23,000 of capital gains is taxed at the zero-percent rate and the balance of $1,000 is taxed at the maximum capital gains rate of 15 percent. This makes the capital gains tax $150 on the $24,000, for an average tax rate of 0.625 percent. Qualified dividends also affect your marginal capital gains tax rate. You know the amount of your qualified dividends because they are listed separately on the Form 1099s sent by payers. The impact is demonstrated by adding qualified dividends to the facts in Example 3, demonstrated in Example 4. William L.“Bill” Hoover is forestry professor, Extension coordinator, and assistant head for the Department of Forestry and Natural Resources, Purdue University 1159, W. Lafayette, IN 479071159; . taxing issues 36 A zero-percent tax rate will replace the 5-percent rate for capital gains realized after December 31, 2007. The zero-percent rate applies to gains through the end of 2010, assuming Congress doesn’t change the law between now and then. Let’s see if you will benefit from this change. This explanation will get convoluted, but I’m certain you’d expect nothing less from the efforts of Congress to “simplify” the tax code. The tax rates on both ordinary income and capital gains are indexed with the rates increasing with both kinds of income. The capital gains rate is tied to the ordinary income rate, which is tied to the level of your ordinary income. So the starting point is the amount of your ordinary income, which includes salary, wages, business income, non-qualified dividends, and taxable interest, among others. I’ll demonstrate this point using the numbers for a married couple filing a joint tax return for the 2008 tax year, Example 1. Example 1. The salaries of Mr. and Mrs. Jones total $85,000 in 2008. Their additional income from interest and investments total $15,000. They take the standard deduction of $10,900, and two personal exemptions of $3,500 each. This makes their taxable income $82,100 and their tax liability $13,258. But we need to look at their marginal tax rate. Here’s the breakdown for their tax liability. The first $16,500 of taxable income is taxed at 10 percent — $1,650. The next $49,050 is taxed at 15 percent — $7,357.50. The remaining $17,000 of taxable income is taxed at 25 percent — $4,250. Adding the tax for the three brackets: $1,650 + $7,358 + $4,250 gives the $13,258 tax due. The average tax rate on their gross income of $100,000 is Tree Farmer JANUARY/FEBRUARY 2008

Table of Contents for the Digital Edition of Tree Farmer - January/February 2008

Tree Farmer - January/February 2008
Contents
Cover Story
BASF Honors Sustainable Forestry
Inspectors Honored
Tree Farmers Gather
Timber Talk
Taxing Issues
Wildlife Matters
Tools & Techniques

Tree Farmer - January/February 2008