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Lower capital gains rates -- for some taxpayers
By Kay Bell • Bankrate.com
Investing, as millions of stock market players
learn every year, is a gamble. And even when your stock bet pays
off, you lose some earnings to taxes.
But there is a way to lessen your investment
tax burden. If you hold your investments for more than a year, any
gains are taxed at considerably lower rates than money from wages
or other regular income.
And on Jan. 1, 2001, this tax break got even
better for very patient investors.
Don't start counting your newfound investment
riches yet, however. As with most tax laws, nothing is as simple
as it first seems.
A 2 percent tax-rate
cut
Most income is taxed according to six tax
brackets, with 2002 rates ranging from 10 percent to 38.6 percent.
Tax legislation
enacted on June 7, 2001, will keep reducing these rages incrementally
over the next few years.
Capital gains from assets held for more than
a year before being sold, on the other hand, are taxed at much lower
rates: 20 percent for people in the top four brackets and 10 percent
for filers in the lower income categories.
And at the beginning of 2001, these long-term
capital gains rates dropped even more, from 20 to 18 percent and
from 10 to 8 percent.
Not so fast -- and not
for everyone
Congress decided in 1997 to implement these lower rates in 2001
to encourage even more long-term investing. But there are a couple
of catches.
First, to qualify for the new rates a taxpayer
must hold onto an investment for more than five years instead of
the existing one-year period.
Second, the new tax break won't do some current
investors much immediate good.
Taxpayers in the lowest bracket will get the
full benefit of the new capital gains rules. This means 8 percent
taxes for gains on assets bought in 1997 or before and sold in 2002
as long as the taxpayer is in the 15 percent bracket.
Taxpayers in the higher tax brackets, however,
will find that the new 18 percent capital gains rate applies only
to assets acquired after Dec. 31, 2000.
Any lower tax bill for these investors will not be realized until
2006.
And stocks that these higher-income taxpayers
owned before Jan. 1, 2001, regardless of how long they've been held,
aren't eligible for the new 18 percent rate.
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