THE BASICS

A capital gain

is the profit that can result from buying and selling capital assets.

To compute your capital gain, you subtract your basis (the cost of the

asset plus the expenses associated with buying and holding it) from the

net proceeds you realize from the sale. Under current law, if you've held

the property for more than one year, your gain or loss is a long-term

capital gain or loss. If, on the other hand, you've held the property

for one year or less, your capital gain or loss is short-term.

The Taxpayer

Relief Act of 1997 lowered the long-term capital gains tax rates. The

maximum capital gains tax rate on most long-term capital gains is 20 percent

(10 percent for those in the 15 percent tax bracket.) Under prior law,

the maximum rate was 28 percent and 15 percent, respectively. (The long-term

capital gain tax on collectibles such as artwork, rugs, trading cards,

stamp and coin collections, and memorabilia remains at 28 percent.) Short-term

capital gains are taxed at the taxpayer's ordinary income-tax rate, which

could be as high as 39.6 percent.

NEW RULES TO

TAKE EFFECT JANUARY 1, 2001

Beginning January

1, 2001, the capital gains tax rate is lowered to 18 percent (8 percent

for those in the 15 percent bracket) for assets held more than five years.

For those in the 15 percent bracket, assets held prior to January 1, 2001

are eligible for lower rates, provided they are held for more than five

years. To qualify for the lower capital gains rates, those in tax brackets

above 15 percent must acquire the asset after December 31, 2000 and hold

it more than five years.

Higher-bracket

taxpayers who want to apply these lower rates to assets held on December

31, 2000 may do so by electing to treat the asset as sold on January 1,

2001 (or the next business day) for its fair market value and paying the

tax due on the gain. Under this election, the five-year holding period

would begin on January 2, 2001. You cannot recognize a loss under these

rules.

STRATEGIES

FOR REDUCING CAPITAL GAINS TAXES

There are a

number of strategies that taxpayers can employ to reduce capital gain

taxes. The first requires absolutely no effort on the taxpayer's part.

Just hold on to your capital assets. It's that simple. Your stock may

soar from an initial price of $2 per share to $200 a share, but you don't

owe a dime on its appreciated value unless you sell it.

A second strategy

involves planning. If you have a taxable capital gain in any one year

and some losing investments in your portfolio, selling them can help offset

your taxable gain and reduce your overall tax bill.

You begin by

matching short-term losses against short-term gains and long-term losses

against long-term gains. Then, if you have an overall net loss, you may

deduct it from ordinary income (i.e., your salary) up to a maximum of

$3,000 in one year ($1,500 if you're married filing separately). If your

loss is greater than what you're allowed to deduct, you may deduct the

excess in later years. Be sure to avoid the "wash sale" rule,

which states that you cannot claim a loss from the sale of a security

if you buy the same security as a replacement within 30 days before or

after the sale.

With the third

strategy, rather than selling assets, you give them away. When you donate

appreciated property that you've held for more than a year to charity,

you may be able to deduct the fair market value and avoid capital gains

tax on the appreciation.

In general,

there is a limitation on the deduction for this type of gift of 30 percent

of your AGI. Any excess may be carried over for five years. A similar

strategy calls for gifting your child, age 14 or over, the appreciated

assets. Presuming that your child is in a lower tax bracket than you are,

he or she would owe less in taxes when the property is sold.

CPAs say you

should not let tax considerations be the prime motive behind your investment

decisions. Rather, consider the tax implications in light of your savings

and investing goals.

The GSCPA is

the premier professional organization for CPAs in the state of Georgia.

With over 10,000 members throughout the state, the purpose of the GSCPA

is to promote the study of accountancy and applicable laws, provide continuing

professional education, maintain high ethical and work standards, and

provide information about accounting issues to the membership and the

public. For more information, access our web site at www.gscpa.org

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