| Update on Capital Gains and Dividend Taxes | | | | The tax on a long-term capital gain is currently |
| Despite protests, the House is moving to extend | | | | 15% if you are in the 25% income tax bracket or |
| the special tax rates for capital gains and | | | | higher and just 5% if you are in the 15% or lower |
| dividends to 2010. The rates were set to expire in | | | | tax bracket. |
| 2008. | | | | As you will see, qualifying for the long-term rates |
| Taxes are a part of our lives and there is no | | | | is important. |
| getting around that fact. | | | | Short-term Capital Gains |
| That said, there is no legal or moral reason for | | | | If you hold a stock less than one year before |
| you to pay any more than you are legally | | | | selling it, the IRS classifies the sale as a |
| required to pay. With some planning and fore | | | | short-term capital gain and taxes the profit as |
| knowledge, you can keep your tax bill for your | | | | ordinary income. This means you could pay 25% |
| stock investing to a minimum. | | | | or much higher of your profit in taxes. |
| This is not an article on tax dodging or evasion, | | | | Unless there is a compelling reason, hold on to the |
| nor is it a substitute for competent tax counsel | | | | stock long enough to qualify for the long-term |
| for complex tax issues. I have an agreement with | | | | capital gains rates. |
| my tax attorney friends – I | | | | Dividend Tax |
| don’t practice tax law and they | | | | Companies that distribute profits through dividends |
| don’t sue me. So far, it’s | | | | create a taxable event for you. The IRS taxes |
| working out pretty well. | | | | dividends at 15%, but this is a tax-relief provision |
| What I would like to introduce in this article are | | | | that could expire in 2008 if not renewed. |
| the two main ways income or profits from | | | | Otherwise, dividends may be considered ordinary |
| investing in stocks may be taxed: | | | | income and taxed at your current rate. |
| Capital gains tax | | | | There is not much you can do to avoid some tax |
| Dividend income tax | | | | on dividends, unless you hold your stock in a |
| Both of these taxes may come into play and | | | | qualified retirement plan and have a dividend |
| here is when and how they are different: | | | | reinvestment plan. |
| Capital Gains Tax | | | | Tax Planning |
| A capital gain occurs when you sell an asset for a | | | | If you have made sure all of your capital gains |
| profit. | | | | qualify as long term, your next possibility is to |
| That asset could be a house, land, machinery, | | | | look at any losing stocks you may want to dump. |
| stock, or a bond. When that happens, the capital | | | | You can take a capital loss in the same year you |
| gains tax comes into play. Since we are discussing | | | | have a gain and offset it. |
| stocks, I’ll stick with how the tax | | | | This is one of the reasons the stock market |
| applies to investing. | | | | some times dips toward the end of the year as |
| You figure the capital gains tax on the difference | | | | investors dump losing positions to offset gains. |
| between your “basis†in the | | | | However, don’t sell a stock just for |
| stock and the sales price. This difference is your | | | | tax reasons. If there is good reasons to expect |
| profit or loss. The basis is usually what you paid | | | | the stock will rebound, it doesn’t make |
| for the stock, however if you inherit the stock, | | | | much sense to sell it. |
| the basis is the price of the stock on the day the | | | | Wash Rule |
| owner died. | | | | The IRS has a rule in place to prevent investors |
| If the difference between the basis and the sales | | | | from selling a stock in a losing position to offset a |
| price is negative, in other words, you lost money; | | | | gain, only to turn around and buy the stock right |
| you have a capital loss, which you can use to | | | | back. |
| offset capital gains. | | | | It is called the “wash rule†and |
| There are two types of capital gains: | | | | it says you can’t sell a stock and buy it |
| Long-term Capital Gains | | | | back within 30 days and claim a capital loss. If you |
| Short-term Capital Gains | | | | sell a stock and buy it back within 30 days, the |
| Understanding the difference is very important. | | | | IRS will disallow the capital loss and you will lose |
| Long-term Capital Gains | | | | the offset. |
| You must hold the stock at least one full year to | | | | Conclusion |
| qualify for the long-term capital gains rates. This is | | | | If you are careful you can keep the tax bite to a |
| extremely important and I encourage you to | | | | minimum, however always seek competent tax |
| make absolutely sure by holding the stock | | | | counsel with questions about complex tax |
| one-year and a day at least. | | | | questions. |