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TAX PROVISIONS IMPACTING INVESTORS IN 2008March 2008It is common year-end tax planning practice among investors to obtain a capital loss deduction, by selling a stock or security (“stock”) that has decreased in value. The loss is utilized to offset their capital gains. If the investor maintains an affinity for the stock they may desire to maintain it in their portfolio and quickly repurchasing it. Internal Revenue Code (IRC) § 1091 limits an investors ability to repurchase a stock sold at a loss beginning thirty (30) days before the date of the sale and ending thirty (30) days after such date (the “waiting period”). If the stock is repurchased during the waiting period the loss deduction will be disallowed under IRC § 165. An exception will apply if the investor is a dealer in stock and the loss is sustained in a transaction made in the ordinary course of such business. In addition, the Revenue Ruling disallows the use of Section 1091(d), which preserves the built-in loss in the property repurchased that is subject to Section 1091 through an upward adjustment in basis equal to the disallowed loss. Many individuals were surprised when the capital gains tax provisions contained in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) were not be amended prior to 2008. As a result, individuals who fall into either the ten percent (10%) or fifteen percent (15%) income tax brackets (the two lowest brackets) will reap the benefits of a zero percent (0%) tax rate on qualifying stock dividends and long-term capital gains. Under TIPRA, the zero percent (0%) tax rate will remain in effect through 2010. A capital gain is the profit derived upon the sale of a capital asset (stock, bond, mutual fund share, art, collectible, stamp, antique, coin and real estate). Taxation of the gain is determined by whether the capital asset was owned for one year or less (short term gain) or for more than one year (long term gain). The classification difference results in a short term gain being taxed at the taxpayer’s maximum income tax bracket while a long term gain will be taxed at the taxpayer’s long-term capital gains rate (either 0% or 15%). There are several methods available to take full advantage of the zero percent capital gains rate. The methods include parents giving appreciated stock to adult children not earning a big salary or to low-income family members who require financial assistance, or to retirees with little or no taxable income. For example purposes, in 2008 a married couple filing a joint tax return will qualify for the zero percent capital gains rate with taxable income up to $65,100. The amount is actually higher when the taxpayer’s personal exemptions or standard deduction are factored into the equation. For more information, please contact one of the following Cohen & Grigsby attorneys: Henry C. Cohen at 239.390.1903 (hcohen@cohenlaw.com) Lisa H. Lipman at 239.213.4055 (llipman@cohenlaw.com) Marc J. Soss at 239.444.1839 (msoss@cohenlaw.com) Carl E. Westman at 239.213.4040 (cwestman@cohenlaw.com)
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