February 3 , 2008 - I've heard there is zero tax on long-term capital gain and dividend income this year. Can this be true?

Beginning this year and continuing through at least 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate (last year, a 5% rate applied to such income). Is this true investor nirvana? The answer is "yes," not only for lower-bracket individuals but also, surprisingly, for some whose top dollars are taxed well in excess of 15%. The amount of income taxed at 0% depends on the interplay between an individual's filing status, taxable income, and how much of that taxable income consists of long-term capital gain and dividends. Catholic public

The zero tax rate is available only for a noncorporate taxpayer who has a net capital gain and/or qualified dividend income.

Net capital gain generally is the excess of net long-term capital gains over net short-term capital losses, subject to certain netting rules. But the zero tax rate doesn't apply to collectibles gain or small business stock gain, both taxed at a maximum rate of 28%, or to unrecaptured Code Sec. 1250 gain, which is taxed at a maximum rate of 25%.

Qualified dividend income generally is dividend income received from domestic corporations and qualified foreign corporations.

For tax years beginning after 2007, a 0% tax applies to so much of the net capital gain, or if less, taxable income, that doesn't exceed the excess (if any) of:

(1) the amount of taxable income that would be taxed at a rate below 25% (without taking the special capital gains rates into account), over
(2) taxable income reduced by the adjusted net capital gain.

The balance of the taxpayer's adjusted net capital gain is taxed at 15%.

The amount of taxable income that would be taxed at the regular tax rate below 25% (in (1), above) is the amount that would be taxed at 10% or 15%, since those rates are the only regular tax rates that are below 25%. As a result, the amount at (1) for a particular taxpayer can't exceed the "top" (also known as the break-point) of the 15% rate bracket for his filing status. The amount at (1) also marks the maximum tax-free amount of adjusted net capital gain. For 2008, the amount is:

• $32,550 for single taxpayers and married taxpayers filing separate returns;
• $65,100 for married taxpayers filing joint returns and surviving spouses; and
• $43,650 for heads of households.

The amount at (2) is taxable income other than adjusted net capital gain, namely: ordinary income (e.g., wages and interest income) plus net short-term capital gain, plus any collectibles gain, Code Sec. 1202 gain, or unrecaptured Code Sec. 1250 gain.

Simplified Method : A short-hand way to express the amount of a taxpayer's adjusted net capital gain taxed at 0% is:

(1) the break-point amount-the "top" or break-point of the 15% bracket (for 2008 it's $32,550, $65,100, or $43,650 depending on filing status), minus

(2) net regular taxable income (taxable income reduced by adjusted net capital gain).

Example: Jeff and Jane Kane are "coupon clippers" whose taxable income of $60,000 for 2008 consists entirely of qualified dividends. The break-point amount for joint filers is $65,100, and the Kanes have no regular taxable income, so the 0% tax rate applies to all of their taxable income.

Example : John and Jane Doe file jointly and have taxable income of $65,000 in 2008, $55,000 of which is ordinary income and $10,000 of which is adjusted net capital gain consisting of long-term capital gain on the sale of stocks and qualified dividend income. The break-point amount for joint filers is $65,100, and the Does' regular taxable income is $55,000, so the 0% tax rate would apply for up to $10,100 of adjusted net capital gain ($65,100 - $55,000). Because the Does' adjusted net capital gain of $10,000 is less $10,100, all of it qualifies for the 0% tax rate.

Most children who are subject to the kiddie tax won't benefit from the 0% tax rate if their parents are in the higher brackets. Under stricter rules that apply beginning this year, a child is subject to the kiddie tax if (a) he or she has not attained age 18 before the close of the tax year; or (b) is age 18, or is a full time student over age 18 but under age 24, and his or her earned income doesn't exceed one-half of the amount of their support.

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