NUA and 2010 Cap Gain rate for 15% bracket filer
This falls under the category of almost sounds too good to be true – so what am I missing???
Here’s the scenario: Client’s husband died in March 2010. Has $140k of ESOP and Company Common Stock Fund (mostly ESOP if it matters) (also, not sure what cost basis is yet).
Based on his date of death, and her expected 2010 earnings, she is in a 15% tax bracket for ordinary income for 2010. SO…. per phoenixwm.phl.com, and per QuickFinder, capital gains tax rate for filers in the 10-15% ordinary income bracket is 0% for 2008 thru 2010.
Really? Can this be? Can she really get the $140k with no tax? What am I missing? Is this for real?
Permalink Submitted by Alan Spross on Fri, 2010-07-09 22:54
Yes, it is for real, but there is a greater cost than you indicated despite the -0- tax rate.
If the cost basis per share is very low relative to market value, the LT gain upon sale of the NUA shares would be over 100k. That amount alone would spill over into the 25% bracket and the amount over the top of the 15% bracket is taxed @ 15%.
If the cost basis is higher, then the ordinary income tax rate that applies to that cost will apply, ie more will be at the full ordinary rate and less at the LT cap gain rate, whether 0 or 15%.
If a qualified LSD is taken and all the shares sold in 2010, then a combination of ordinary income and LT cap gains will apply, but 140k will STILL be included in AGI, and might result in reduced itemized deductions if itemizing.
There is no requirement to sell all the shares. She might just sell enough to stay in the 15% bracket and keep the cap gain rate at 0. What is problematic is that we will not know what Congress is going to do about any of these rates for 2011 until most likely after the election. That will not leave much time for getting the LSD done. But she could start the LSD proceedings soon but not sell the NUA shares until December. That said, no guarantee Congress will act before year end and there is no legal requirement for them to do so. Politics seems to trump any concern for taxpayers being able to plan or even the IRS being able to publish tax material on time.