Captial Gains


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Captial Gains

  1. 1. Cutting losses to lower taxes As you manage your investment portfolio in today’s market, it is important to take into account any tax impacts of your investment decisions, especially at the end of the year. Changes you make today could have an impact on your 2008 tax return. Every time you sell a capital asset including: stocks, bonds, mutual funds, investment real estate, even collectibles, there is likely a tax impact. Making use of losses The current investment and economic environment has created an increased likelihood that you may take a loss on the sale of an asset. You need to assess how gains and losses match up in your portfolio, and consult with your tax professional to see if there are tax-saving opportunities. For example, if you purchased $10,000 worth of stock more than 12 months earlier, but its value has declined to $8,000, you could sell it today and realize a long- term capital loss of $2,000. By contrast, if another stock you owned for more than 12 months has returned a profit of $2,000 or more, you could also sell that position, and have most, or all, of the gain offset by losses you’ve taken in your other investment. This can be an effective way to help cushion the blow of investment losses by lowering your tax bill. Know when to hold One key factor in determining just what tax rate applies to your sale of a capital asset is the length of time you have held it. The most favorable rates apply when you own the asset for more than 12 months. It then qualifies for long-term capital gains tax
  2. 2. treatment, rates that can be significantly lower than those that apply to assets sold within a 12-month holding period. It is important to note that this only applies to investments held in “taxable” accounts. Tax-deferred savings, such as your workplace retirement plan, IRAs and annuities, are not affected by capital gains tax. Any distributions from tax- deferred accounts are taxed as ordinary income, subject to higher rates. Long-term capital gains are taxed at a 15 percent rate by the federal government for taxpayers with gains taxed in the 25 percent tax bracket or higher. The rate is zero percent for those whose gains fall in the 10 percent or 15 percent bracket for ordinary income taxes. By contrast, if the sale is subject to short-term capital gains tax rate, the tax owed will match the higher rate that applies to your ordinary income taxes. So a $1,000 gain on the sale of an asset held one year or less would result in federal income taxes of $250 for a person in the 25 percent tax bracket. By waiting more than 12 months to make the sale, the 15 percent long-term capital gains tax applies, resulting in a tax of just $150 – a $100 savings. If the same person were in the 15 percent bracket the federal income taxes on the long-term gain would be zero percent. While taxpayers often realize long- term capital losses to offset long-term capital gains, taking long-terms capital losses to offset a long-term capital gain otherwise taxed at zero percent is not necessarily a tax- saving strategy. Timing for higher rates Long-term gains on items such as collectibles, including coins, stamps and antiques, are taxed at a maximum 28 percent for all individuals. For people below the 28 percent tax bracket, their ordinary tax rates apply. There is also a different rate for real estate where depreciation was applied. Since depreciation reduces the cost basis on the
  3. 3. property, it also increases the realized gain on the sale. Depreciation amounts are recaptured and are taxed at a maximum 25 percent rate (lower for those in the 10 percent and 15 percent tax brackets). Keep in mind that capital losses offset capital gains in the same year if that results in a net capital loss, you can use up to $3,000 of the loss to offset ordinary income and carry any remaining loss to future years. For example, if you sold assets at a $10,000 capital loss, but you only had $2,000 worth of capital gains to offset the capital losses, you can only deduct $3,000 of capital losses to reduce your taxable income. That could leave $5,000 in losses that can be carried forward to offset future gains or income in other tax years. This is another factor to keep in mind as you manage asset sales near the end of the year. It may make sense to sell only part of a losing position in the current year if you will not be able to utilize all of the losses. Find an expert In the current volatile market environment, coordinated support from both your tax professional and financial advisor can be critical to capturing the greatest tax benefit from your investment moves. Daniel J. Lensing, CPRC Financial Advisor Business Financial Advisor Ameriprise Finanical Services, inc. 14755 No. Outer 40, Suite 500 Chesterfield, MO 63017 Tel: 636-534-2097 This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial
  4. 4. advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial. Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC. © 2008 Ameriprise Financial, Inc. All rights reserved. File # 80160 (12/08)