Bush's Tax Cut Time Bomb
The most problematic segment of our economy right now is the housing industry. Its floundering this year has sent ripples through the economy affected other segments and slowing economic growth to recessionary levels (while inflation rises). We all hope that this is a temporary condition— realtors and economists alike suggest that home prices will begin to rise again next year, as demand increases and inventories decrease.
But wait: here's something they may not have considered. Bush's tax cuts included a provision that dropped the lowest capital gains tax rate for 2008-2010. If you're below the 25% tax bracket, for three years the capital gains tax drops to zero!
Imagine having an appreciated asset, like a rental home, that you could sell tax free; would you pass up that opportunity? Few people would.
Beginning in 2008, we can expect a flood of new homes for sale on the market, exerting further downward pressure on prices, and all but guaranteeing a continued slide in the housing market. Laying aside the moral question of tax-free investment income, this is likely to have serious detrimental effects on our already-struggling economy.
It's not too late to change next year's tax rates. So write your Congressperson. Ask him or her to defuse the time bomb. Because, while no one wants to pay more taxes, for most of us the cost will be higher if the economy tanks.
But wait: here's something they may not have considered. Bush's tax cuts included a provision that dropped the lowest capital gains tax rate for 2008-2010. If you're below the 25% tax bracket, for three years the capital gains tax drops to zero!
Imagine having an appreciated asset, like a rental home, that you could sell tax free; would you pass up that opportunity? Few people would.
Beginning in 2008, we can expect a flood of new homes for sale on the market, exerting further downward pressure on prices, and all but guaranteeing a continued slide in the housing market. Laying aside the moral question of tax-free investment income, this is likely to have serious detrimental effects on our already-struggling economy.
It's not too late to change next year's tax rates. So write your Congressperson. Ask him or her to defuse the time bomb. Because, while no one wants to pay more taxes, for most of us the cost will be higher if the economy tanks.
I think the amount of the gain is added to your taxable income, so a large gain (like selling a house), would bump many people out of eligibility for the tax break. The house would either have to not have appreciated much, or the person would have to have extremely low taxable income that year, for this to be a good tax strategy.
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BNA Tax Service waxes ineligantly on the subject below. To be honest, I can't quite follow it all the way throiugh-- but it seems to suggest that, for example, a single person could earn $40,000 in regular income (just enough to be under the 25% rate bracket in 2008, allowing for standard deduction and on exemption) and reap the benefits of the 0% capital gain tax. A married couple with two kids could earn $90,000 in regular income and still qualify. And don't forget that qualified dividends are also taxed at the capital gains rate, so those living off stock investments don't need to worry about that income disqualifying them.
Locally, our average per capita income is about $13,568 per person, so almost everyone would qualify (if they had a capital asset to sell). The median Household income for Americans is $44,389, meaning most households in the country would qualify. You're right, those who have high earnings from regular sources wouldn't benefit from this-- but those living off their investments would.
Clearly the rate doesn't benefit everyone-- but my point is that it will benefit many, and that will encourage selling and exert additional downward pressure on home prices.
BNA explains:
"The taxable liability of an individual who has a net capital gain for a taxable year equals the sum of five tax amounts. The first tax amount is the tax that, in the absence of the maximum capital gains rates, would be imposed on the individual's ineligible income. Ineligible income is the greater of the individual's taxable income reduced by the net capital gain, or the lesser of two component amounts. The first component amount equals the amount of taxable income subject to tax at a rate below 25%. The second component amount equals taxable income reduced by the adjusted net capital gain, as described below.
"The second tax amount is the aggregate of several components. The first component amount is five percent (0% for taxable years beginning after December 31, 2007 and beginning before January 1, 2011) of the lesser of taxable income or the net capital gain computed while ignoring collectibles gain and ยง1202 gain. The second component amount is eight percent of the lesser of the qualified five-year gain (taking into account property held through May 5, 2003), and any excess of the second tax amount (computed without regard to the maximum capital gains rate) over the first tax amount. The third component amount is 10% of any excess of taxable income (computed without regard to maximum capital gains rate) over the sum of the first and second tax amounts...
"The third tax amount is the sum of 15% of the lesser of: any excess of the individual's taxable income reduced by the net capital gain over the first tax amount, or the taxable amount (computed without regard to maximum capital gains rate) plus 20% of any excess of the taxable amount (computed without regard to maximum capital gains rate) over the first tax amount....
"For taxable years beginning before 2001, there is no fourth tax amount. Instead, for those taxable years these gains are subject to the fifth tax amount. The fifth tax amount equals 28% of any excess of taxable income over the sum of the amounts subject to the first four tax amounts. Observation: Even though the rate reductions enacted in 2001 and accelerated in 2003 incrementally lowered the 28% rate to 25% between 2001 and 2003, the 28% rate used in the fifth tax amount is not reduced. Under certain circumstances, capital gains subject to the fifth tax amount can be taxed at a rate higher than the rate that would apply if the capital gains were ordinary income"
Source for 2008 tax rates: http://taxguru.org/incometax/Rates/1040-08.htm
Source for Iron County Average Income: http://en.wikipedia.org/wiki/Iron_County,_Utah
Source for median household income in the U.S.: http://en.wikipedia.org/wiki/Household_income_in_the_United_States
BNA Tax Service is available by subscription only.
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