(Dow Jones) While everyone knows that the wealthy have more capital gains than others, what's less known is how closely tied those gains are to age.
In fact, the amount of capital-gains income taxpayers report to the Internal Revenue Service rises steadily along with age, with one exception: those between the ages of 45 and 55 report more than those between 55 and 65 years old, according to new IRS data based on 2008 tax returns.
Wealth advisors were somewhat taken aback by the findings, provided in a recent annual release of data the agency has been making available for the past few years. Most of it, they said, made a certain sense, but they don't tend to think about capital gains in that light.
Scott A. Hodge, president of the Tax Foundation, which reported on the data, said that the "standard presentation" is that the rich pay more capital gains. He called the new information "very unique" data that the public does not usually see. Don Weigandt, a wealth advisor in the Los Angeles office of J.P. Morgan Private Bank, said he had never seen capital gains data presented as a function of a taxpayer's age.
Long-term capital gains rates, currently capped at 15%, are expected to rise in 2010 with the sunset of tax cuts enacted by George W. Bush in 2001 and 2003. The top capital gains rate, in place since 2003, hasn't been this low since 1941.
If Congress does nothing, the top long-term rate will go to 20%, with a 10% rate for lower brackets next year. But, President Barack Obama has proposed a 20% rate for single filers who earn more than $200,000 ($250,000 for married filers), a 15% rate for those in the top four brackets under that, and 0% for the lowest bracket.
John Goldsbury, senior vice president at U.S. Trust, Bank of America Private Wealth Management, said age rarely matters in capital gains planning. The only two exceptions involve the elderly, he noted, because death can affect capital gains in two ways. First, investments held at death get a so-called step-up in basis, which shrinks capital gains by readjusting the value of an appreciated asset (the usual rules do not apply this year because of the one-year estate tax hiatus). Second, capital losses can be carried forward year after year, but only until death.
The Tax Foundation noted that while 6% of all tax returns reported capital-gains income, 13% of taxpayers over age 65 reported it, as compared with lower percentages reported by all of the other age categories. A third of all taxpayers that reported capital gains were over age 65, and earned 30% of all capital-gains income, the Tax Foundation said. The income comprised 12% of their total adjusted gross income.
Capital-gains income was not concentrated solely with those over 65 years old, though. Some 40% of taxpayers who reported capital-gains income were between 45 and 65 years old; they earned nearly half of all capital-gains income.
As for theories about why the younger group would report more gains than the older one, Goldsbury speculated it could be that the former were likely to hold more stocks than bonds in their portfolios.