Your Tax & Business Advisor
New Lower Capital Gains Rates

By Raymond S. Kulzick, CPA, DBA
As published in the Pinecrest Tribune. March 2, 1998. 

What changes were made regarding capital gains taxes in the 1997 Taxpayer Relief Act?

The good news is, major reductions in capital gains tax rates were made effective in mid-1997, with additional reductions scheduled for 2001 and 2006. Capital gains arise when an individual sells an asset for a price higher than his or her cost. Most property owned and used for personal reasons, pleasure, or investment qualifies for special capital gains treatment under the tax law.

The bad news is, a variety of special rules and complex situations can exist. Schedule D (for reporting capital gains and losses) has become more complex, doubling in length for 1997. The IRS estimates that the average taxpayer will spend a total of four hours and 19 minutes just on Schedule D! Additionally, everyone receiving capital gains distributions from mutual funds must file Schedule D this year.

The old rules apply to gains realized (stocks sold, for example) before May 7, 1997. For assets held more than 12 months, the tax rate is 28% (15% for taxpayers in the 15% marginal tax bracket).

For gains realized between May 7, 1997 and July 28, 1997, the rate is 20% (10% for taxpayers in the 15% bracket) for assets held longer than 12 months.

For gains realized after July 28, 1997 and held more than 12 months (but less than 18 months plus one day), a new medium-term capital gains rate applies. This rate is the same as the old long-term rate of 28% (15% for taxpayers in the 15% bracket). For capital assets held longer than 18 months, the lower rate of 20% (10% for taxpayers in the 15% marginal bracket) applies.

Some loopholes used in the past for converting short-term gains to long-term have been closed. Also, some types of assets previously qualifying for capital gains treatment are now excluded. Gains on capital assets not qualifying for special capital gains rates are still taxed at ordinary income rates. As a final note, investors in mutual funds face an especially complex situation in determining holding periods for capital gains tax purposes.

Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or rkulzick@kulzick.com. More information is also available on the firm's Web site at http://www.kulzick.com/businesspro.