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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

2011 Capital Gains Tax Rates

Jun 06, 2011

We seem to be getting a lot of requests or searches on what the capital gains tax rate is for 2011.

In summary, capital gains and qualified dividend tax rates are as follows:
 
  • Short-term (assets held less than a year) are treated as ordinary income.  This means that the maximum tax rate will be the same as your current top marginal tax bracket which can be as high as 35%.
  • The depreciation recapture on equipment is also considered to be ordinary income.  This income is taxed in the year of sale even if no cash is received.  This can trip up farmers when they retire if they are not careful.  The top rate on depreciation recapture for the sale of real estate is 25%.
  • For assets held for more than one year, the top capital gains tax rate is 15%.  If the farmer is in the 15% income tax bracket or lower, than the capital gains tax rate is zero.  This special rate only applies to the amount of the gain that is within this 15% tax bracket.  For example, if the 15% tax bracket ends at $70,000 and the farmer has other taxable income of $45,000 and a net long-term capital gain of $100,000, $25,000 would be taxed at zero and the remaining $75,000 taxed at 15%.
  • Remember, that qualified dividends from a C corporation are also subject to this special lower tax rate.  If you have retained earnings in a C corp, this year and next would be a great time to considered distributing those earnings and not paying more than 15% tax on the dividend.
 
These are all federal tax rates.  Most states tax capital gains and dividends as regular income, however, certain states may have reduced rates for capital gains.  Please make sure to check with your tax advisor for your local state tax rules.
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