Capital Gains Cuts in 1997 Tax Act

Capital Gains Cuts in 1997 Tax Act

Cut in capital gains tax rate for long-term gains

Capital gains tax rate for 1997 depends on many things

Not all assets qualify for new lower rates

Capital gains rate changes slightly after 2000

Cut in capital gains tax rate for long-term gains

Assets held for longer than 18 months will face a maximum rate of 20 percent

This is the new maximum long-term rate, down from 28 percent

The new holding to qualify for long-term rates is up from 12 months

Assets held from 12 to 18 months will still face the old capital gains rate of up to 28 percent

This is a completely new holding period called the mid-term rate

Assets held under 12 months will still be taxed at ordinary income tax rates of up to 39.6 percent

This short-term rate is unchanged from previous law

There's now greater incentive to turn ordinary income into capital gain income

Lower rate comes at the price of increased complexity and a longer holding rate

People in the lower, 15 percent, tax bracket will only face a 10 percent tax on long-term capital gains

Capital gains tax rate for 1997 depends on many things

Transition year of 1997 will have many different tax rates and holding periods

	Capital gain tax rate
Holding Period, Sale Date	ordinary or short-term rate 28 - 39.6%	mid-term rate 28%	long-term rate 20%
< 12 months	x
> 12 months, sale before May 7, 1997		x
> 12 months, sale May 7 - July 28, 1997			x
12 - 18 months, sale after July 28, 1997		x
> 18 months, sale after July 28, 1997			x

Above table is only applicable for those in the 28 percent tax bracket or higher. Those in the 15 percent bracket will have more favorable treatment

Not all assets qualify for new lower rates

Long-term capital gain from sale or exchange of depreciable real estate not already recaptured (and taxed at ordinary rates) will face a top rate of 25 percent, rather than 20 percent

Collectibles such as coins, stamps, jewelry and fine art still will face a maximum rate of 28 percent even if held for more than 18 months

Capital gains rate changes slightly after 2000

Beginning in 2001, the 20 percent rate drops to a "super long-term" rate of 18 percent for assets acquired after 2000 and held five years or more

This is a small bone thrown to those who wanted inflation indexing incorporated into capital gains treatment

The super long-term rate is only a slight reduction in tax at the price of holding the asset an additional 3.5 years

Can execute a "phantom sale and purchase" at fair market prices as of Jan. 1, 2001 to reset acquisition date and qualify for future gains at the 18 percent rate

This procedure is also known as "marking to market"

Big drawback : Must pay taxes on the phantom sale

Probably a gimmick to help balance the budget by year 2002

The phantom sale is not recommended for securities that have a large gain

A phantom sale might be considered for those assets with minimal gains to date, but for which you expect significant appreciation in the future

For those in the lowest tax bracket, the super long-term rate after 2000 will be 8 percent

Unlike higher brackets, there is no requirement that the asset be acquired after 2000 (but still must meet five year holding period)