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Financial
Focus
Provided by Michael J Haynes
Edward Jones Investments
Take
Advantage of Cut in Capital Gains
Rate
By now,
you're probably pretty 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
capital gains taxes.
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 take a smaller 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 think you need to make some
changes because your portfolio isn't
diversified enough. (Rebalancing your
portfolio may have transaction costs or
commissions associated with doing so.)
No matter
what your reason for selling a stock,
though, you'll now find it more
affordable, from a tax standpoint. But the
capital gains cut isn't just beneficial if
you're going to sell stocks - it's also
good news if you're giving them away.
For
example, if you give 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 advisors before making
any important capital gains-related moves.
And take the time to explore all the
opportunities the new tax laws have given
you.
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