Happy New Year, Everyone!!!
I thought January 1 would be a good time to discuss a little tax strategy. As I am anticipating a banner year for DCI in 1999, taxes have been on my mind and I have been doing a bit of research. I wanted to throw out a little tax tidbit for everyone's consideration and to get some feedback from those of you with more knowledge of tax laws than myself (Colin, for example).
Let's say that you own 50,000 shares of DCI at an average share price of $1.75, and on March 30, 1999 DCI is sold for $12 a share. There are many ways in which the sale could take place, and the realization of capital gains could conceivably be delayed for sometime. But for simplicity sake, let's say you receive a cash payment of $12 for all 50,000 shares on March 30. That means that you realize a capital gain of $512,500. Now what? Well, the law says that you are required to pay taxes "as you go", and this means that you must pay estimated taxes on April 15 of this year on your gains. Assuming a 30% bite for federal and state taxes, you have to send off a check in the amount of $153,750 to the government two weeks after your big gain.
NOT NECESSARILY!! There are some specific exceptions that allow you to opt out of the estimated tax requirement for this year. This will allow you to hold onto and invest that extra money for another year until you have to file your 1999 tax return on April 15, 2000. Even if you just stuck it into a low-yield CD, it would earn you an extra $7000-8000.
There appear to be two relevant exceptions: 1) no estimated tax payments are required if your 1998 withholding and credits add up to at least as much as your prior year's tax; 2) no estimated tax payments are required if all of the following are true: a) You had no tax liability for the 1998; b) You were a U.S. citizen or resident for the entire year; c) Your tax year covered a 12-month period.
Obviously, you couldn't do this two years in a row because you would have a large tax bill due on April 15, 2000, and this would disqualify you for the following year. But this loophole allows you to keep a windfall capital gain and continue to invest it for the balance of the tax year.
Now, I need to state that this is my understanding of this tax rule. I disclaim any responsibility for misinterpretation. Be sure to check with a tax consultant. But this appears to be a real gift to those receiving a large capital gain, especially if it occurs early in the year.
Does anyone else have anything to add? Corrections and additions would be welcome.
Here's wishing all of us a prosperous and joyful 1999.
PA
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