OT: RE: Cap Gains...may be of interest...
Cutting Your Capital Gains Tax By Louise Nameth Even if you were fortunate enough to escape fall's rumbling bear (market), you're not out of the woods yet. There's another threat to your earnings right around the corner: Uncle Sam. The year end is coming quickly, and, for some investors, that means it's time to consider juggling your gains and losses in order to minimize the effects of capital gains taxes. This year's volatile market has given investors many factors to consider: gains from securities bought in the market's downturns, losses from holdings that never bounced back, and, as always, year-end mutual fund distributions. Fortunately, one significant event should make tax management easier for investors: in August, the federal government eliminated the mid-term capital gains provision for 1998. As a result, investors now need only to know whether they have held mutual fund shares or individual securities for more or less than 12 months in order to determine the tax treatment of sales made this year. With the new legislation, assets held for more than 12 months are considered long-term holdings and are taxed at a maximum capital gains rate of 20%, while assets held for 12 months or less are taxed at your regular income tax rate, which could be as much as 39.6%. Calculating Cap Gains
Stocks or Assets Held Maximum Capital Gains Tax Rate
12 months or less 39.6%
More than 12 months but less than 60 months 20%
More than 60 months (and acquired after 2000) 18%
Prior to this year, assets held between 12 and 18 months were considered mid-term holdings and were taxed at a maximum capital gains of 28%. (The mid-term rates still applies for sales made in 1997). "Eliminating the mid-term provision for 1998 means an enormous reduction in complexity for investors," says Michael Carona, a CPA and tax partner at PricewaterhouseCoopers. "Now there is a single test - 12 months - to determine whether a holding will be subject to short-term or long-term gains." With that in mind, consider these ways to reduce your tax bill before you struggle through your next Schedule D.
Making the most of year-end selling
If you are going to sell a winner, you most likely want to pay the least amount in taxes possible. As a general rule, try to sell long-term winners (those held over 12 months) first to benefit from the new, lower 20% maximum capital gains rate. "If you're not in a loss position," says Barbara Raasch, a CPA with Ernst & Young, "think twice about selling shares held for 12 months or less because of the higher short-term rate." Another way to reduce capital gains is to sell that underperformer in your portfolio now rather than wait until January. Under federal tax law, if you have some clear loss leaders in your portfolio, you can sell enough shares of those losers to wipe out all your realized capital gains for the year plus another $3,000 in regular income ($1,500 if married and filing separately). A note of caution: if you're selling a loser to offset gains, you cannot buy the same security within 30 days before or after the sale. In that situation, "wash sale" tax rules will disallow the loss. That sounds easy. But which losers should get the boot? "It's an economic decision," says Gary Greenstein, Fidelity Investments' vice president, taxation. "You can always buy the stock back after 30 days in order to avoid wash sale restrictions, but you have to be comfortable with being out of the market for that period of time." To get the most use out of your losses, you may want to sell your short-term losses first and then any long-term losses. Your short-term losses will offset any of the more expensive short-term gains, which, again, are taxed at your regular income tax rate. Any short-term losses left over will then offset long-term gains (maximum 20% tax rate), and lastly up to $3,000 of regular income. On the flip side, long-term losers first offset long-term gains (20%), then short-term gains, and lastly up to $3,000 of regular income. If you're still confused, you may want to consult your accountant or financial planner.
Timing your buys and sells
If you have owned appreciated mutual fund shares over 12 months and are contemplating bailing out, you may want to think about selling before an upcoming December dividend. In this scenario, your shares would be considered a long-term holding and your entire gain would qualify for the 20% rate. However, if you sell after the dividend has been declared, part of the dividend would likely consist of ordinary income. That means you would owe up to 39.6% on the ordinary income part of the dividend, and, if 1997 sales by the fund contributed to the dividend, another 28% on mid-term gains. Year-end purchases are a different story. Before buying, you may want to wait until after the dividend distribution has been made. If you buy just before the ex-dividend date, you would get back part of the money you just invested and would owe taxes on it. To avoid this outcome, call the fund. Ask for the ex-dividend date and the estimated payout. If the dividend is big enough to concern you, consider making your purchase after that date.
Buying low turnover funds
Portfolio managers create capital gains and losses every time they buy and sell a stock, resulting in taxable distributions. One way to protect yourself from a hidden mutual fund gain is to investigate the turnover rate of funds. The turnover rate is the percentage of a fund's holdings that are traded out of the fund during the year. A high turnover rate means high trading activity on the fund manager's part, which, in turn, may spell higher potential distributions for investors.
Reallocating your assets
You also may want to take a hard look at how you are allocating your investments. As a result of the recent changes Congress made to the capital gains tax, the after-tax difference between a $1 gain in capital appreciation and a $1 gain in dividend income is even larger. To avoid paying higher tax rates on dividend income, you may want to consider tilting your portfolio away from high-yielding stocks and bonds. If you own securities that pay big dividends, consider moving them to your 401(k) or IRA, where they would be sheltered from taxes. Of course, you should also consider any taxes you may need to pay on your holdings.
Giving away your shares
If you give appreciated stock to a public charity, neither you nor the charity is taxed on the gain, and you can deduct the full market value. (See Giving Well
Parents also can make gifts of appreciated assets to a child of up to $10,000 per taxpayer per year, free of estate and gift taxes. As long as the child is in a lower tax bracket than the parents, he or she will owe less in taxes when the shares are sold. Some restrictions, such as the "kiddie tax," may have an impact on this strategy and should be reviewed before making any gifts in this way. Please consult a tax advisor with respect to your individual circumstances. Louise Nameth is a freelance business writer who has written for Business Week and the New York T
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