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