Lawmakers Cut Gains Taxes, But They Didn't Make It Easy

This week's column features a multiple choice question. If you own stock and sell the stock at a gain, at what rate will the gain on the stock be taxed?

10%, 15%, 20%, 25%, 28%, 31%, 36%, 39.6%,

If you guessed any one of the above rates, you may have the right answer. That's right. Depending on factors such as the amount of non-capital-gain income you earned and the date on which you sold your stock, any one of the above rates might be the one for you.

Congress may have felt they were doing taxpayers a favor this year by lowering the tax on capital gains, but it seems to me they just made things more confusing. Add this confusion to the controversial issue of whether capital gains should be taxed at all, and you've got one major league headache.

Let's take a look at the situations that control which tax rate applies to your capital gains.

First, consider how long you owned the stock before selling it. If you owned your stock for less than one year, the gain is called a short-term gain and is taxed as ordinary income. This means that whatever tax rate you pay on your other income (15%, 28%, 31%, 36%, or 39.6%) will apply to your short-term capital gain.

Pre-5/7/97 stock sales

Next, consider the date on which your stocks were sold. For stocks sold prior to 5/7/97, the stock must have been owned for at least 12 months to qualify for special capital gain treatment. This long-term sale of stock is taxed at a maximum rate of 28%. This doesn't mean that all of your long-term capital gains on sales prior to 5/7/97 are taxed at 28%. The capital gain income is added to your other income and the 28% ceiling only comes into play if your income tax rate on all of your income is higher than 28%.

Your 1997 income, including capital gains, has to exceed these amounts before you need to worry about limiting the tax on capital gains to 28%.

  • Single taxpayer $59,750
  • Married filing jointly $99,600
  • Married filing separately $49,800
  • Head of Household $85,350
  • Surviving Spouse $99,600

If your income is higher than the amount above that applies to your filing status, and you had long-term capital gains, you will want to calculate your tax on Schedule D so that you can limit the tax on the capital gains to $28%.

Stock sales between 5/7/97 and 7/28/97

Special "mid-term" rates apply to stocks sold after 5/6/97 and before 7/29/97 and held for at least 12 months. The maximum tax on sales of stocks that fall into this time capsule is 20%.

There's a special rule that applies to gain on these stocks if the taxpayer is in the 15% tax bracket. Since the 20% maximum capital gain tax rate doesn't provide any benefit for this taxpayer, there is a 10% maximum tax rate on mid-term stocks for the 15% taxpayer. Your tax rate is 15% if your income is no higher than these amounts:

  • Single taxpayer $24,650
  • Married filing jointly $41,200
  • Married filing separately $20,600
  • Head of Household $33,050
  • Surviving Spouse $41,200

Stocks sold
after 7/28/97

The rules change again for stocks sold after 7/28/97. Gains on stocks sold after this date are taxed at a maximum rate of 28% if they are held 12 months or more, and a maximum rate of 20% if they are held for at least 18 months. Once again, the 20% rate falls to 10% for taxpayers in the 15% tax bracket.

Depreciable real estate

Here's another twist. If you sold depreciable real estate at a profit, some of the gain (the amount based on previously-deducted depreciation calculated at straight-line rates) is taxed at a maximum rate of 25%. This new 25% rate is applicable for sales after 5/7/97.

Thanks, Uncle Sam. Let's just take a moment to thank our lawmakers in Washington for, once again, providing us with an example of good old-fashioned tax simplification. I'm sure glad they're not trying to make the new tax laws complicated.

copyright © 2000 Gail Perry - Fun with Taxes

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