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JULY 2008

Zero Rate Tax

Added July 2008

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This may sound like fiction to many people, but there is a federal zero percent tax rate that begins in 2008. Before we get too excited, we need to point that there are limitations and the rate will not benefit everyone that files a tax return.

Here are the basic rules. The zero percent tax rate applies to Long Term Capital Gains and Qualified Dividends that would be taxed at the two lowest ordinary tax rates. The two lowest brackets are 10% and 15%. The zero rate replaces the 5% rate of tax on this income for years before 2008. The zero rate is available for 2008 thru 2010 under current law.

The eligible gains and dividends are still included in income and are a part of determining Adjusted Gross Income. The income is simply tax at a zero rate. In order to determine if the zero rate applies we add the qualified amount to the taxable ordinary income. That is all ordinary income after subtracting the allowable deductions. If the gain and dividend income falls in the 10% or 15% bracket than it is taxed at zero %. Any gain or dividend amount that is above the 15% bracket is taxed at the maximum Long Term Capital Gain rate of 15%.

The 15% bracket for the different filing statuses in 2007 ended at the following amounts of taxable income:

• Single $31,850 of taxable income

• Married Filing Joint $63,700 of taxable income

• Head of Household $42,650 of taxable income

• Married Filing Separately $31,850 of taxable

• These are the 2007 amounts the 2008 amounts will be higher.

The calculation of the tax rate can be complicated and each individual’s circumstances will vary. Please consult your tax professional to determine how the rate will effect your personal tax situation.

Copyright 2008