Published December
2003
Take
advantage of the cut
in capital gains tax
By
now, you’re probably familiar with some elements of the Tax Relief Act
of 2003. If you have children at home, you’ve likely received your child
tax credit “bonus’’ payments. And you may have seen your take-home pay
increase in response to cuts in marginal tax rates. But there’s another
key area of the new legislation that you may have yet to explore — the
cut in the capital gains tax rate.
Here’s how it works:
If you’re in a tax bracket of 25 percent or higher, you only will have
to pay a capital gains rate of 15 percent (down from 20 percent) on the
sale of stocks, mutual funds or some other types of assets you’ve held
for at least a year.
This cut could have
major implications for your investment strategies. You can now sell appreciated
stocks or mutual funds and incur a lesser “tax hit.” But why would you
want to sell in the first place?
Like all investors,
you need to periodically adjust your portfolio to make sure it contains
the mix of investments that’s suitable for your individual goals and risk
tolerance.
Over time, you may
decide that some of your stocks, for example, no longer suit your needs.
Why? Maybe the management team has changed a company’s direction. Or maybe
that company belongs to an industry whose long-term prospects now look
poor. Or maybe you’re “overweighted” in a particular stock and need to
rebalance your portfolio to reduce that specific risk. (Rebalancing your
portfolio may have transaction costs or commissions associated with doing
so.)
No matter what your
reason for selling a stock, though, from a tax standpoint you’ll now find
it more affordable. But the capital gains rate cut isn’t just beneficial
if you decide to sell stocks. It’s also good news if you’re giving them
away.
For example, if you
gift appreciated stocks to your grown children, they will ultimately have
to pay capital gains taxes based on the total growth achieved from the
time you bought the stock. Now, with the lower capital gains taxes, they
won’t face such a hefty cost.
But you might also
want to give appreciated stocks to younger children, especially those
who are over age 13 and are exempt from the “kiddie tax’’ rules (which
stipulate that investment income over $1,500 will be taxed to them at
your individual tax rate).
In fact, the new
capital gains laws present you with a particularly unusual opportunity:
If you give appreciated stocks today to a child over 13, the child can
sell the stocks in 2008 and pay no capital gains taxes, assuming the child
is in the 10 percent or 15 percent tax bracket.
Normally, anyone
in those brackets will only have to pay a 5 percent long-term capital
gains rate, but in 2008 only, this rate drops to zero. This special tax
break can result in an excellent source of funding for a time-sensitive
goal, such as college.
Clearly, the cut
in capital gains taxes can provide you with some significant benefits,
along with some strategic and bookkeeping challenges. If you sold some
stocks before May 6, when the new laws went into effect, your capital
gains will still be taxed at the old rate, most likely 20 percent. That’s
why you might want to consider selling some “losers’’ to counter the gains
that were taxed at the higher rate.
See your tax and
financial advisers before making any important capital gains-related moves.
And take the time to explore all the opportunities the new tax laws have
now made possible for you. Doing so may be well worth your effort.
Eric Cumley is an
investment representative with Edward Jones Investments at 1201-C SE Everett
Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is
an NYSE-member investment firm with more than 8,000 locations nationwide.
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