Thursday, December 04, 2008

Do You Know the Top Tax Rate on Long-Term Gain?

Careful! It's a tricky question.

Last year, when the family needed to add to its cash reserves, we sold shares of Apple. The shares had been purchased for under $10 per share (split adjusted) back in the bust, so the capital gain was humongous.

We had little in the way of investment losses to offset the gain (remember those days?). Still, the federal income tax on long-term gain is no more than 15%. Could be worse.

It was worse. At tax time we discovered that, except for people with exceptionally large incomes, long-term gain is not truly exempt from the Alternative Minimum Tax. The result, as explained here, was to boost the tax on our Apple gain to around 22%.

Oh, well. It could have been worse.

And it is. As senior citizens, my wife and I recently received polite notes from a Social Security computer, announcing a boost in our retirement benefits to offset inflation, negated by a significant cut in the benefits we would actually receive in 2009.

The cut results from a surcharge – the SS computer calls it "an income-related monthly adjustment amount" – on the premium we pay for Medicare Part B. The surcharge is based on MAGI:
We ask the Internal Revenue Service (IRS) for your tax [sic] income. We then add your adjusted gross income together with your tax-exempt interest income to get an amount that we call modified adjusted gross income (MAGI) . . . .

MAGI may include one-time only income, such as capital gains . . . . One-time income will effect your Medicare Part B premium for only one year.
Thanks to the humongous capital gain, our MAGI results in surcharges for 2009 equal to another two-percent tax on the gain. That brings the overall tax rate to 24%.

During the election campaign, weren't the Democrats talking about a 20% capital-gains tax? Sounds good to me!


Jim Gust said...

Glad to had the sense to jump out at the top last year. Better a 24% tax than a 50% loss, no?

On the other hand, Paine Webber still sees the stock going back to $235.

JLM said...

I didn't say I sold all our Apple shares. Perish the thought!