|
A capital-gains loophole
Dear Tax Talk:
I retired early in 2000 and planned to be in
the 15 percent tax bracket through 2003. I have some stock that
I've been holding for more than five years, and I want to reduce
my tax exposure. I should have sold some last year because my taxable
income was well below the 15 percent bracket, but I didn't. The
total amount of stock I should sell this year will put me into the
27.5 percent bracket, causing 20 percent capital gains on some of
it. However, it looks like I may be able
to take advantage of the provision that allows a "deemed sale"
in 2001, though the intent may be a bit different. If I can do this,
I will only pay 8 percent capital gains tax on the deemed sale in
2001.
Then, if I actually sell that same stock in
2002, I'll only pay 10 percent on the additional gain and I can
sell another block and pay only 8 percent capital gains on it. That
way I can sell as much stock as I should in 2002, and only pay 8-to-10
percent capital gains on all of it.
The rub is that the unplanned gain in 2001 will
cause an underpayment penalty, though even with that it looks like
I can save a decent chunk. This appears to be a wonderful loophole
for my circumstance. Am I misinterpreting or missing something?
Bill
Dear Bill:
It's nice to get the question and answer all from one user,
it cuts back on my involvement. Unfortunately, you're kind of on
the hook for the underpayment penalty, and I don't see an exception
there.
Back in 1997, Congress passed a tax law that
said a taxpayer can elect to treat certain capital assets sold in
a deemed sale on
Jan. 1, 2001. If the taxpayer makes this election with their
2001 tax return, then future gain on the assets may be taxed at
a lower rate. The lower rate first applies to those elected assets
sold five years after the deemed sale date, which won't be until
2006, so we don't really need to be concerned about those assets
for now.
The lower rate, however, is available in 2001
for those taxpayers in the 15 percent or lower tax bracket for that
tax year. The rate is reduced from 10 percent to 8 percent on those
assets held more than five years for which either the gain election
is made or those actually sold in 2001.
Since you didn't get around to selling your
five-year assets, the election is a perfect way in hindsight to
take advantage of the loophole. If you sell the elected assets within
five years, you'll pay tax at the 10 percent rate on appreciation
since the deemed sale date (provided you're still in the 15 percent
or lower bracket). After the five years, you get the 8 percent rate
on all gain if you're in the 15 percent or lower bracket, or 18
percent if you're in a higher tax bracket.
-- Posted: Jan. 30, 2002
Bankrate.com writers base their answers on our
editorial content and advice of financial professionals. We make
no claims or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
|
