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