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Articles:
Net Gains: Want
to Cut Your Tax Bill? Quirk in Law Allows Tax-Free Stock Sales in 2008, for
People in Lower Brackets
Capital Gains
Tax Cuts For Middle Income Investors
Oklahoma Congress
Eliminates State Long Term Capital Gains Tax
Net Gains: Want to Cut Your Tax Bill?
Quirk in Law Allows Tax-Free Stock Sales in 2008, for People in Lower Brackets
By DAVID McPHERSON
Nov. 7, 2007
For the small-time investor, 2008 is shaping up to be a
pretty good year. No, I have not a clue how the stock market will perform next
year other than to say on some days it will go up and on others it will go down.
But on Jan. 1, 2008, a window will open that will allow some taxpayers to sell
investments at a profit and pay no capital gains tax. That's right, no tax.
Not everyone will qualify for the zero-percent capital gains
tax, but for those who do, it may be an opportunity too good to pass up. I bring
this up now knowing that as we approach the end of 2007 many investors will
be reviewing their portfolios and considering whether to sell some holdings
and buy new ones. For those of modest incomes, it might be worthwhile to delay
a sale until after the start of 2008.
Here's why: In 2003, Congress passed -- and President Bush
signed -- tax legislation that lowered the maximum long-term capital gains tax
rate from 20 percent to 15 percent. And for those in the two lowest tax brackets,
it went even further, lowering the capital gains rate to 5 percent. As a bonus,
the 2003 legislation implemented a zero-percent capital gains tax rate for the
two bottom tax brackets, the 10- and 15-percent brackets. Originally, that zero-percent
tax on capital gains was to be in place for just one year, in 2008.
Last year, however, Congress added two more years, meaning
the zero-percent capital gains tax rate is scheduled to be in place from 2008
to 2010. Some skeptics believe that three-year window
could be narrowed after the 2008 presidential election, depending upon the outcome. Now, let's step back for a little explanation of capital gains.
A capital gain represents the appreciation in the value
of an investment, whether it is a stock, bond, mutual fund or piece of real
estate. Say you buy 100 shares of mutual fund X for $5,000 and then sell those
100 shares for $15,000. You then have a capital gain of $10,000. Sell those
shares now, and you would be looking at $500 in tax if you're in the 10- or
15-percent tax brackets. Wait until Jan. 1 to sell those shares, and there will
be no tax due if you fit within those two tax brackets. Taxpayers in the 25-percent
or higher brackets would face a $1,500 capital gains tax on the above sale.
Some commentators dismiss the zero-percent rate as being
available only in modest amounts to a small share of U.S. taxpayers, but I say
it's an opportunity to be studied and then seized if appropriate. Donna LeValley-Cocovinis,
a tax attorney and contributing editor of J.K. Lasser's Your Income Tax Guide
series, said she thinks retirees will be the biggest beneficiaries of the zero-percent
rate. "Just by virtue of having low, virtual income, they shouldn't have
too much problem fitting in," she said. She said others who could benefit
would be adult children who provide financial support to their retired parents.
In such a case, the adult child could transfer the appreciated asset to the
parent as a gift and the parent could sell the asset with no capital gains tax
due. "People are going to have to be somewhat creative to take advantage
of this," LeValley-Cocovinis said.
It is those taxpayers in the 10- and 15-percent brackets
who will qualify for no capital gains from 2008 to 2010. Now, the 10-percent
bracket encompasses the lowest of incomes, and it's true that many within it
hold minimal investments. But the 15-percent bracket takes in much of the U.S.
middle class.
For 2008, a married couple filing jointly qualifies for
the 15-percent bracket with taxable income up to $65,100. That figure is actually
higher than it sounds when you account for personal exemptions and the standard
deduction. For instance, a married couple with two children could earn up to
$90,000 in 2008 and still qualify for the 15-percent bracket. If the parents
are contributing to a 401(k) – as they should be if eligible -- the gross income
figure could be even higher.
Keep in mind, eligibility for the zero-percent rate will
be governed by how much you fall within the 15-bracket and how large your capital
gain will be. An investor whose ordinary income falls within the 15-percent
bracket could be pushed up into the next bracket by a large enough capital gain.
In such a case, the investor would benefit partially from the zero-percent rate.
The portion of a gain that pushes them into the 25-percent bracket or above
would be taxed at the 15-percent capital gains rate. That means you can't sell
an investment with a $100,000 gain and pay no capital gains.
Also, be aware of one major pitfall when looking to apply
the zero-percent rate. Its usefulness for children under age 18 – and up to
23 if a full-time student -- is limited due to expansion of the "kiddie
tax" last year by Congress. A child with investment income in excess of
$1,700 is subject to taxation at the parent's capital gain rate if that is higher.
One other warning: Social Security recipients should be aware the higher income
from capital gains could increase or trigger taxation of their Social Security
benefits. That's going to require some careful calculations, depending upon
your individual situation.
"No gifts come without any sort of take backs,"
LeValley-Cocovinis said. This work is the opinion of the columnist and in no
way reflects the opinion of Robert Williams or InterWest Realty.
David McPherson is founder and principal of Four Ponds Financial Planning
( www.fourpondsfinancial.com ) in Falmouth, Mass. He previously worked as a financial writer and editor
for The Providence Journal in Rhode Island. He is a member of the Garrett Planning
Network, whose members provide financial advice to clients on an hourly, as-needed
basis. Contact McPherson at david@fourpondsfinancial.com.
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Capital Gains Tax Cuts For Middle Income
Investors
By DAVID McPHERSON
Imagine selling a $20,000 investment, purchased
five years earlier for only $10,000, and paying no capital gains tax at all.
This dream will become reality for middle-income investors
beginning in 2008 and will last for three years when a seldom-discussed provision
of the recent tax cuts takes effect, providing middle-income investors with
a can't-miss tax-planning opportunity. Under the Tax Increase Prevention and
Reconciliation Act of 2005 (TIPRA) passed by Congress in May 2006, U.S. taxpayers
in the two lowest tax brackets will pay no capital gains taxes on long-term
investments sold in 2008, 2009 and 2010. This tax-free bonanza applies to investors
within the 10% and 15% tax brackets, which account for the vast majority of
American taxpayers. (For more information see the IRS's 2006 Federal Tax Rate
Schedules.)
The zero capital gains tax for these taxpayers had already
been slated to take effect in 2008, but TIPRA added two more years, significantly
expanding the tax-planning opportunity. The years 2008 to 2010 might be the
time to sell mutual fund shares in a taxable account if they are worth significantly
more than when they were first purchased, but have struggled in recent years.
It might also be a time to establish a higher basis in a still-favored investment,
or it could be the right time to sell shares in anticipation of a child heading
off to college. (To find out more about TIPRA, see TIPRA Helps Convert Your
Plans And Save More, A Great Time To Add Roths To Your Retirement Planning and
Recent Legislative And Other Updates.)
Capital Gains Tax Basics
Currently, the maximum capital gains tax rate for assets
held for more than one year is 15%. Those held for less than one year are subject
to the higher tax rates that apply to ordinary income. The 15% capital gains
rate applies to taxpayers in the 25%-and-higher income brackets.In the 10% and
15% brackets, the current tax rate for long-term capital gains is 5%. That is
pretty attractive, but it still can't match the 0% rate that will be in effect
from 2008 to 2010. This year, taxable income up to $61,300 qualifies a married
couple filing jointly for the 15% bracket.The rates in place for capital gains
also apply to qualifying dividends. This means that an investor in the 15% tax
bracket currently pays $5 for every $100 in dividend income. From 2008 to 2010,
dividend income to middle income taxpayers (again those in the 10% and 15% brackets)
would be tax-free.
The first steps toward a zero capital gains tax for middle-income
investors were taken in 2003. That is when Congress lowered the maximum capital
gains tax rate from 20% to 15% to give Americans an incentive to save and invest.
The legislation was called the Jobs and Growth Tax Relief Reconciliation Act
of 2003 (JGTRRA). (To learn more, read The JGTRRA: Reducing Dividend Tax Rates.)For
taxpayers in the two lowest tax brackets, under JGTRRA, the capital gains tax
rate went from 10% to 5%, and then in 2008 it was scheduled to fall to 0% for
just that one year. Then in 2009, the maximum rate was to return to 20%, and
the rate for the two lowest tax brackets was to return to 10%. Dividends would
be taxed again at ordinary income rates.
The Tax Increase Prevention and Reconciliation Act of 2005
This is where TIPRA took over. It extended the favorable
rates on capital gains and dividends by two more years.Other TIPRA provisions
include relief from the alternative minimum tax, a one-year waiver of income
limits on Roth IRA conversions in 2010, the extension of small business expensing
thresholds and the expansion of the so-called kiddie tax. (To find out more
about these subjects, see Kids Or Cash: The Modern Marriage Dilemma, Don't Forget
The Kids: Save For Their Education And Retirement, 401(k) Plans For The Small-Business
Owner and Plans The Small-Business Owner Can Establish.)
The Middle-Income Investor
For middle-income investors, however, the best thing about
TIPRA may be the opportunity to sell significantly appreciated investments without
paying capital gains taxes over a three-year period. Make no mistake; the pool
of investors who stand to benefit from the zero capital gains rate is quite
large. According to the Internal Revenue Service (IRS), taxpayers in the 10%
and 15% tax brackets accounted for 63 % of all individual income tax returns
filed for 2003. More tax was generated at the 15% rate than at any other rate
for that tax year, IRS figures show. Recent U.S. Census Bureau stats indicate
that the median household income in the United States was about $46,000 in 2005,
suggesting that the majority of Americans fall within the 10% and 15% tax brackets.
Among married couples, the median household income is higher, nearly $66,000
in 2005, according to the Census Bureau.
Again, the top-end limit for a married couple filing jointly
is $61,300, but that is taxable income - after deductions and exemptions. That
means a married couple with two children taking the standard deduction could
earn up to $84,800 in 2006 and still fit within the 15% bracket. ($84,800 minus
the standard deduction of $10,300 and minus four exemptions for each family
member at $3,300 each comes to $61,300.) According to the data, therefore, the
vast majority of Americans will qualify for the zero capital gains and dividend
taxes available from 2008 to 2010.
But do these middle-income Americans invest? Yes. The median
income of U.S. households that own mutual funds is $68,700, according to the
Investment Company Institute, a trade association for the mutual fund industry.
The median mutual fund holding among these households is $48,000, the group
says. In 2005, according to ICI, about half of all U.S. households owning mutual
funds in 2005 had incomes between $25,000 and $75,000.
Tax-Saving Scenarios
Now let's consider some scenarios under which a middle-income
investor might take advantage of the zero capital gains period. Let's return
to our first example. Suppose that there is an investor who bought shares of
a single stock 10 years ago at an initial price of $10,000. The investor held
the stock, reinvested the dividends, and now the holding is worth $20,000. At
some point, the investor wanted to sell. Maybe, it was to diversify. Maybe the
company's future prospects weren't as bright as they once were. Regardless,
the investor wanted out of the stock, but had been reluctant to sell because
of the capital gains tax. Currently, the 15% tax bracket investor would pay
$500 on that gain, but beginning in 2008 that same investor would pay nothing
at all for the same transaction.
A second scenario might involve a recent retiree who owns
highly appreciated shares of a growth mutual fund purchased over the course
of his working life. Now retired, he wants to reduce his portfolio's risk, but
has been worried about the tax bill. Selling all, or some, of those shares between
2008 and 2010 eliminates the tax worry.
Consider a third scenario. An investor holds a long-term
position in a well-managed, low-cost mutual fund that he is happy to stick with.
The investor could lower future capital gains taxes on that investment by selling
it in the 2008-to-2010 period, pay no capital gains and then repurchase shares
of the same fund, establishing a higher basis for future sales and thereby reducing
the capital gain that eventually will be taxed.
Waiting to Save
Each scenario above assumes the investments are held in
a taxable account as opposed to a tax-favored account like a 401(k) or IRA.
Also, given the current capital gains tax for the 10% and 15% brackets is just
5% now, under certain circumstances it may not be worth waiting more than a
year for the zero capital gains period to begin. But as 2008 gets closer, middle
income investors may want to wait to enjoy the coming tax-free bonanza. It's
time to start planning for next year, now.
David McPherson is a financial writer and editor based in
Massachusetts. He holds a certificate in financial planning from Boston University
and has passed the Certified Financial Planner® examination. His website is: www.davidmcpherson.net.
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Oklahoma Congress Eliminates State Long
Term Capital Gains Tax
710:50-15-48. Oklahoma Source: Capital Gain Deduction
(a) General provisions. For tax years beginning on
or after January 1, 2005, individual taxpayers can subtract from the Oklahoma
adjusted gross income, gains reported on their Oklahoma income tax return and
included in federal taxable income receiving capital treatment. The gain must
be realized on or after January 1, 2005, in order to be eligible for the Oklahoma
exclusion. Effective for tax years beginning on or after January 1, 2006 corporate
taxpayers can subtract from the Oklahoma taxable income, gains reported on their
Oklahoma income tax return and included in federal taxable income receiving
capital treatment. For corporate taxpayers the gain must be realized on or after
January 1, 2006 in order to be eligible for the Oklahoma exclusion.
(b) Qualifying gains receiving capital treatment. As
used in this Section, "qualifying gains receiving capital treatment" means the amount of net capital gains, as defined under Internal Revenue
Code Section 1222(11), [IRC §1222(11)]. The gain must be included in the federal
income tax return of the taxpayer.
(1) Sale of real or tangible personal property. To
qualify for the Oklahoma deduction, the gain must be earned as a result of the
sale of real or tangible personal property located within Oklahoma. Taxpayers
must have held the asset for not less than five (5) uninterrupted years prior
to the date of the transaction that created the capital gain.
(2) Sale of stock or ownership interest. To qualify
for the Oklahoma deduction, the gain must be earned as a result of the sale
of stock or ownership interest in an Oklahoma company, limited liability company,
or partnership and the stock or ownership interest must have been held by the
taxpayer for at least three (3) uninterrupted years prior to the date of the
transaction that created the capital gain. For tax year 2006 and subsequent
tax years, the stock or ownership interest must have been held by the individual
taxpayer for at least two (2) uninterrupted years prior to the date of the transaction
that created the capital gain. Non individual taxpayer's stock or ownership
interest must have been held for at least three (3) uninterrupted years prior
to the date of the transaction that created the capital gain.
(3) Sale of intangible personal property.
To qualify for the Oklahoma deduction, capital gains that arise as a result
of the sale of intangible personal property, including but not limited to “goodwill”
are limited to transactions that occur on or after January 1, 2008.
(4) Sale of real or tangible personal property by pass-through
entities. Net capital gains earned by member, partner, or shareholder of
a pass-through entity as a result of the sale of real or tangible personal property
located within Oklahoma, and included in the a taxpayer's federal taxable income
is excludable, provided that the taxpayer has been a member of the pass-through
entity for an uninterrupted period of five (5) years and that the pass-through
entity has held the asset for not less than five (5) uninterrupted years prior
to the date of the transaction that created the capital gain.
(5) Sale of stock or ownership interests by pass-through
entities. Net capital gains earned by a member, partner, or shareholder
of a pass-through entity as a result of the sale of stock or an ownership interest
in an Oklahoma company, limited liability company, or partnership, is excludable,
provided that the taxpayer has been a member of the pass-through entity for
an uninterrupted period of three (3) years and that the pass-through entity
has held the asset for not less than three (3) uninterrupted years prior to
the date of the transaction that created the capital gain. For tax year 2006
and subsequent tax years, the stock or ownership interest must have been held
by the individual taxpayer for at least two (2) uninterrupted years prior to
the date of the transaction that created the capital gain. Non individual taxpayer's
stock or ownership interest must have been held for at least three (3) uninterrupted
years prior to the date of the transaction that created the capital gain.
(6) Installment sales. Qualifying gains included
in an individual taxpayer's federal taxable income for years after December
31, 2004, or a corporate taxpayer's federal taxable income for years after December
31, 2005, which are derived from installment sales are eligible for exclusion,
provided the appropriate holding periods are met. Qualifying gains
from the sale of intangible personal property as a result of an installment
sale can be deducted for tax years beginning after December 31, 2007, provided
the appropriate holding period has been met..
(7) Capital Loss Carryover. Qualifying losses
included in an individual taxpayer’s federal taxable income for years after
December 31, 2004, or a corporate taxpayer’s federal taxable income for years
after December 31, 2005, which are being carried forward from a previous year’s
sale are included in the computation of the Qualifying Net Capital Gain.
(c) "Oklahoma company", "limited liability
company", "partnership". An Oklahoma company, limited liability
company, or partnership is one whose primary headquarters has been located in
Oklahoma for at least three (3) years prior to the capital gain transaction.
The Oklahoma company, limited liability company, or partnership must meet the
three (3) year rule for an uninterrupted period.
"This is the Draft forwarded to us from the Oklahoma
Tax Commission in which Ms. Haws added “They are still working on it, but
here is the draft. They have a deadline to have this on the website
by Jan. 18th”
Lisa R. Haws
Tax Policy & Research Division
Oklahoma Tax Commission
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