Wednesday, November 1, 2000
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Wednesday, November 1, 2000 |
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Capital Gains tax planning: the long and short of it Most of us can't escape the fact that we have to pay taxes, but one tax we can control is the capital gains tax. That's because the amount of capital gains tax incurred is triggered by whether and when you sell capital assets. Read what the Georgia Society of CPAs has to say about how effective tax planning can reduce or, perhaps, even eliminate your capital gains tax bill. THE BASICS A capital gain is the profit that can result from buying and selling capital assets. To compute your capital gain, you subtract your basis (the cost of the asset plus the expenses associated with buying and holding it) from the net proceeds you realize from the sale. Under current law, if you've held the property for more than one year, your gain or loss is a long-term capital gain or loss. If, on the other hand, you've held the property for one year or less, your capital gain or loss is short-term. The Taxpayer Relief Act of 1997 lowered the long-term capital gains tax rates. The maximum capital gains tax rate on most long-term capital gains is 20 percent (10 percent for those in the 15 percent tax bracket.) Under prior law, the maximum rate was 28 percent and 15 percent, respectively. (The long-term capital gain tax on collectibles such as artwork, rugs, trading cards, stamp and coin collections, and memorabilia remains at 28 percent.) Short-term capital gains are taxed at the taxpayer's ordinary income-tax rate, which could be as high as 39.6 percent. NEW RULES TO TAKE EFFECT JANUARY 1, 2001 Beginning January 1, 2001, the capital gains tax rate is lowered to 18 percent (8 percent for those in the 15 percent bracket) for assets held more than five years. For those in the 15 percent bracket, assets held prior to January 1, 2001 are eligible for lower rates, provided they are held for more than five years. To qualify for the lower capital gains rates, those in tax brackets above 15 percent must acquire the asset after December 31, 2000 and hold it more than five years. Higher-bracket taxpayers who want to apply these lower rates to assets held on December 31, 2000 may do so by electing to treat the asset as sold on January 1, 2001 (or the next business day) for its fair market value and paying the tax due on the gain. Under this election, the five-year holding period would begin on January 2, 2001. You cannot recognize a loss under these rules. STRATEGIES FOR REDUCING CAPITAL GAINS TAXES There are a number of strategies that taxpayers can employ to reduce capital gain taxes. The first requires absolutely no effort on the taxpayer's part. Just hold on to your capital assets. It's that simple. Your stock may soar from an initial price of $2 per share to $200 a share, but you don't owe a dime on its appreciated value unless you sell it. A second strategy involves planning. If you have a taxable capital gain in any one year and some losing investments in your portfolio, selling them can help offset your taxable gain and reduce your overall tax bill. You begin by matching short-term losses against short-term gains and long-term losses against long-term gains. Then, if you have an overall net loss, you may deduct it from ordinary income (i.e., your salary) up to a maximum of $3,000 in one year ($1,500 if you're married filing separately). If your loss is greater than what you're allowed to deduct, you may deduct the excess in later years. Be sure to avoid the "wash sale" rule, which states that you cannot claim a loss from the sale of a security if you buy the same security as a replacement within 30 days before or after the sale. With the third strategy, rather than selling assets, you give them away. When you donate appreciated property that you've held for more than a year to charity, you may be able to deduct the fair market value and avoid capital gains tax on the appreciation. In general, there is a limitation on the deduction for this type of gift of 30 percent of your AGI. Any excess may be carried over for five years. A similar strategy calls for gifting your child, age 14 or over, the appreciated assets. Presuming that your child is in a lower tax bracket than you are, he or she would owe less in taxes when the property is sold. CPAs say you should not let tax considerations be the prime motive behind your investment decisions. Rather, consider the tax implications in light of your savings and investing goals. The GSCPA is the premier professional organization for CPAs in the state of Georgia. With over 10,000 members throughout the state, the purpose of the GSCPA is to promote the study of accountancy and applicable laws, provide continuing professional education, maintain high ethical and work standards, and provide information about accounting issues to the membership and the public. For more information, access our web site at www.gscpa.org
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