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Question for the Money Doctors

Question submitted on Jan 9, 2012.

Question

Read that there is no tax on long term capital gains for 2011&2012 if married income under $69,000. I can cash a annuity of $120,000 invested to $150,000 not a IRA gain apx $30,000..Have not cash it yet. what to do?? Thanks

Answer

If you are in the 15% tax bracket or lower in 2011 and 2012, the tax rate for long term capital gains is zero. For 2011, the cut-off for the 15% tax bracket for Married Filing Jointly is $69,000 of Taxable Income. ($34,500 if filing Single and $46,250 filing as Head of Household). This is the number of line 43 of the 2011 Form 1040.

For 2012, the cut-off for the 15% bracket for Married Filing Jointly is $70,700 of Taxable Income. (35,350 if filing Single and $47,350 filing as Head of Household)

However, to take advantage of this nice loophole, you need to be very careful. If your income puts you into the 25% bracket, then the tax on long term capital gains is at 15%.

In your example here, the gain from an annuity is considered to be ordinary income and not subject to capital gains rates. This is true even if you held the anuity for more than 12 months.

If you decide to cash in an annuity, there are some other considerations. Please check to see if this distribution will be subject to surrender charges imposed by the insurance company. You may also be subject to an additional penalty tax on early withdrawals. There may also be a state tax penalty also.

You''ll need to evaluate these costs before you take a distribution from the annuity. If you plan on doing this in 2012, a 2012 tax projection should be run to review the tax impact of this distribution.


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