Maximum Tax Rate on Qualified Dividends and Net Capital Gain Reduced

Farm Business Management Update, October - November 2008

By Eric Eberly (eeberly@vt.edu), Extension Agent, Farm Business Management Agent, Central District

For tax years starting in 2008, the 5% maximum tax rate on qualified dividends and net capital gain (the excess of net long-term capital gain over net short-term capital loss) is reduced to 0%. To qualify, taxable income must fall below $65,100, $43,650, and $32,550 for married filing jointly, head of house-hold, and single filing status, respectively. The 15% maximum tax rate on qualified dividends and net capital gain has not changed on taxable incomes higher than the above amounts.

Farmers who have raised breeding stock or timber sales can manage their taxable income to use up the entire 15% marginal income tax bracket. One example of a tax saving opportunity is to sell a cull cow and replace it with a heifer with superior genetics. A sale creating a long-term capital gain of $1000 could generate a tax savings of $150. Making sales of assets without good records or accounting support is not recommended or advised. Sales of depreciable assets can also generate long-term capital gains if the selling price is above the original cost. Depreciation and Section 179 expense deduction can also be used to manage taxable income, but only qualified dividends and long-term capital gains can be taxed at 0%.

In Virginia, all capital gains income is taxed at a maximum rate of 5.75%, so additional state income tax will be due. Depending on your tax situation, alternative minimum tax rules could also apply. In today’s uncertain economy, sound management makes good economic sense.

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