TotalStock
06.01.2001, 18:50
Another 'Election' Hitch -- This One on Capital Gains Tax
By Tracy Byrnes
Senior Writer
1/6/01 10:58 AM ET
Happy New Year. As the ball fell at midnight in Times Square, so did the capital gains rates.
Fabulous. But like all good tax things, our lawmakers have thrown a damper on our party that many pros don't even know about yet.
In a nutshell, folks in the higher tax brackets have the option of making an election that allows them quicker access to these lower capital gains rates. This election is a pretend sale that allows them to treat a holding as if it were sold and repurchased on Jan. 2. Starting the holding period over in 2001 allows the shares to qualify for the new, lower rates. But a recent ruling now requires that if you make this election, you must hold the stock for at least a year. So don't plan on making this election and flipping the shares.
Let's walk through the details now.
If you're a taxpayer in the 15% tax bracket, any capital gains on assets held for at least five years will be taxed at 8%. The 10% long-term capital gains rate still applies to assets held more than a year but less than five years.
Things are not as straightforward for folks in the higher tax brackets. The long-term tax rate for gains on assets purchased after Jan. 1 and held for at least five years will be 18%. Assets held for more than a year but less than five still will be taxed at the 20% rate. Check out this column for details on these decreasing rates.
Fortunately, there's a way for taxpayers in the higher brackets to take advantage of this rate drop on assets purchased before Jan. 1. They can make a "deemed-sale-and-repurchase election" in early 2001. (See this column for more on which stocks to consider making this election.)
This election is a fictitious sale. It allows you to treat a holding as if you sold it and bought it back on Jan 2, the first business day after these new rules took effect. You will owe taxes on any gains generated from this fake sale, and your new tax basis in the securities will be the closing market price on Jan 2.
"But this election is not available if you sell the stock within a year," says Martin Nissenbaum, director of income tax planning at Ernst & Young. So if you make this election, you must keep the stock for at least a year.
This new wrench was signed into law by President Clinton back in December as part of the Community Renewal Tax Relief Act of 2000. Maybe that's why not many folks know about it.
A Jan. 3 New York Times story said that if you happened to sell the stock within a year, you simply would not just make the election. But that's not entirely accurate. If you sell within a year, the election is not even an option for you. You simply can't do it.
Let's say you're holding a stock for two years. You like it as a long-term holding and anticipate holding it for at least five more years. You make a deemed-sale-and-repurchase election now. As long as you hold for five years, any capital gains will be taxed at the new 15% rate.
But you realize in September that the stock is a dog, and you decide to dump it.
You cannot make the election now, so your tax position returns to life before the election happened. You'll go back to your original two-year holding period, and any gains will be taxed at the 20% rate.
Why did they even bother creating this new kink? Our lawmakers do not want you to make the election and then end up with a short-term loss, says Nissenbaum. Short-term losses can be a good thing because they can offset other short-term gains, thereby potentially wiping out your tax liability. (For more on offsetting short-term gains and losses, see this recent column .) And, as my Sicilian mother says, "God forbid" you end up in a beneficial tax position.
Check out the new section 314(c) of the tax code for more light reading.
So if you're in for the long haul, absolutely take advantage of these new rates and be aware of this new rule. But if your time horizon is less than five years, don't even worry your pretty little head about this stuff.
Na dann ob das den Investoren zur Zeit viel hilft, es wird alles versucht.
------------------
Make a good one.
TotalStock
By Tracy Byrnes
Senior Writer
1/6/01 10:58 AM ET
Happy New Year. As the ball fell at midnight in Times Square, so did the capital gains rates.
Fabulous. But like all good tax things, our lawmakers have thrown a damper on our party that many pros don't even know about yet.
In a nutshell, folks in the higher tax brackets have the option of making an election that allows them quicker access to these lower capital gains rates. This election is a pretend sale that allows them to treat a holding as if it were sold and repurchased on Jan. 2. Starting the holding period over in 2001 allows the shares to qualify for the new, lower rates. But a recent ruling now requires that if you make this election, you must hold the stock for at least a year. So don't plan on making this election and flipping the shares.
Let's walk through the details now.
If you're a taxpayer in the 15% tax bracket, any capital gains on assets held for at least five years will be taxed at 8%. The 10% long-term capital gains rate still applies to assets held more than a year but less than five years.
Things are not as straightforward for folks in the higher tax brackets. The long-term tax rate for gains on assets purchased after Jan. 1 and held for at least five years will be 18%. Assets held for more than a year but less than five still will be taxed at the 20% rate. Check out this column for details on these decreasing rates.
Fortunately, there's a way for taxpayers in the higher brackets to take advantage of this rate drop on assets purchased before Jan. 1. They can make a "deemed-sale-and-repurchase election" in early 2001. (See this column for more on which stocks to consider making this election.)
This election is a fictitious sale. It allows you to treat a holding as if you sold it and bought it back on Jan 2, the first business day after these new rules took effect. You will owe taxes on any gains generated from this fake sale, and your new tax basis in the securities will be the closing market price on Jan 2.
"But this election is not available if you sell the stock within a year," says Martin Nissenbaum, director of income tax planning at Ernst & Young. So if you make this election, you must keep the stock for at least a year.
This new wrench was signed into law by President Clinton back in December as part of the Community Renewal Tax Relief Act of 2000. Maybe that's why not many folks know about it.
A Jan. 3 New York Times story said that if you happened to sell the stock within a year, you simply would not just make the election. But that's not entirely accurate. If you sell within a year, the election is not even an option for you. You simply can't do it.
Let's say you're holding a stock for two years. You like it as a long-term holding and anticipate holding it for at least five more years. You make a deemed-sale-and-repurchase election now. As long as you hold for five years, any capital gains will be taxed at the new 15% rate.
But you realize in September that the stock is a dog, and you decide to dump it.
You cannot make the election now, so your tax position returns to life before the election happened. You'll go back to your original two-year holding period, and any gains will be taxed at the 20% rate.
Why did they even bother creating this new kink? Our lawmakers do not want you to make the election and then end up with a short-term loss, says Nissenbaum. Short-term losses can be a good thing because they can offset other short-term gains, thereby potentially wiping out your tax liability. (For more on offsetting short-term gains and losses, see this recent column .) And, as my Sicilian mother says, "God forbid" you end up in a beneficial tax position.
Check out the new section 314(c) of the tax code for more light reading.
So if you're in for the long haul, absolutely take advantage of these new rates and be aware of this new rule. But if your time horizon is less than five years, don't even worry your pretty little head about this stuff.
Na dann ob das den Investoren zur Zeit viel hilft, es wird alles versucht.
------------------
Make a good one.
TotalStock