Question: I hope you can help me understand my 1998 tax situation. In January 1998, I sold some stock that had a capital gain of $27,600. When I mentioned this to my tax person in February, he said I would have to pay 28 percent capital gains tax, plus income tax. I turned 65 during 1998. My approximate other income for this year is six months of Social Security ($5,088) and other income ($6,000). - M.W.
Answer: Tom Cooney, a tax partner with Cincinnati's Rippe & Kingston accounting firm, says the tax on capital gains is an alternative tax computation that allows you to pay a lesser rate of tax on long-term capital gain income. It is designed to replace the ordinary tax rates. On any capital gain, you pay the lesser of the ordinary tax or the capital gains tax. You do not have to pay both taxes.
The 28 percent rate that may have been applicable to you in February has been repealed retroactive to January 1, 1998.
The maximum nominal rate of tax on long-term capital gains is 20 percent in 1998. If you are in the 15 percent tax bracket, the tax rate on the capital gain is 10 percent. For single taxpayers, the 15 percent tax rate is for the first $25,350 of taxable income. For married taxpayers filing jointly, the 15 percent tax rate is in the first $25,750 of income.
In your particular case, if you are single, the capital gain would cause you to pay tax at a 10 percent rate. If you are married, the effective rate would be higher because a portion of your gain would be taxed at 20 percent.
In addition to the direct tax on your capital gain, the gain might cause you to pay additional income taxes. Certain items of income are included in your reported income based on your level of adjusted gross income. For example, one half of your Social Security benefits are taxable to the extent that your modified adjusted gross income exceeds $25,000 ($30,000 for married filing jointly). In your example, the gain would have caused a portion of your Social Security benefits to be subject to tax.
- Perry Brothers
Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
