Money Report

New legislation could impact your investments.

New legislation could impact your investments. Is that a misprint? No. It’s not well known, but beginning in 2008 and through 2010, taxpayers in the lowest two federal tax brackets may use a zero percent rate on qualified dividends and long-term capital gains. Yo u are eligible for this tax break if your adjusted gross income is less than $32,550 for single tax payers or $65,100 for married taxpayers filing jointly.

Many retired couples with comfortable incomes, but who draw a significant part of their income from Social Security and tax exempt interest, may be well below the $65,100 threshold. This presents an opportunity to cash out some of those highly appreciated stock positions or sell an appreciated piece of property without paying a sizable chunk in taxes. In an alternate scenario, children of these retired couples could transfer highly appreciated assets to their parents, while retaining the same cost basis and holding period. The parents could cash the asset out at zero percent capital gain; this strategy could be ideal in the case of children assisting elderly parents.

You must exercise care in calculation prior to cashing out, however, because the capital gain may cause an increase in taxation of Social Security benefits. If the $65,100 taxable income limit is exceeded, the gains can spill over into the 15 percent capital gain bracket. Review the scenarios with your CPA or accountant before making a decision.

Tax year 2008 also ushers in more restrictive kiddie-tax rules, which reduce the tax advantages of gifting to certain children. Now, full-time students under age 24 may be subject to their parents’ highest capital gains rate if the parents contribute more than 50 percent of their support. Over age 24, the kiddie-tax no longer applies. A parent or grandparent can still gift appreciated shares, the grad students can sell them at their zero-percent capital gain bracket and pay for room, board, tuition, beer and golf lessons with tax-free dollars.

A classic strategy to minimize capital gains tax is to gift appreciated shares directly to a charity, rather than simply writing a check. The deduction for the donation is the “fair market value” of the shares and no capital gain is paid by the donor or by the charity when they sell the shares. Both parties benefit. For example, John and Mary Smith always give $1500 each year to their church. At the end of the year they deduct $1500 as a charitable donation on their taxes. Instead, the following year they look through their portfolio and see that the 10 shares of “xyz stock” they purchased in 1970 for $150 is now worth $1500. They have put off selling xyz due to the large capital gains tax. The Smiths decide to donate the ten shares to their church by transferring them to the church’s brokerage account. They can still take a tax deduction for the full fair market value, $1500, and their church can sell the shares and pays no capital gain.

Although it makes sense to take advantage of low capital gains tax opportunities, there should always be a sound investment reason behind your transactions. College funding or paying off a mortgage would be good examples; another in this volatile environment might be to reposition assets that are out of balance in an investment portfolio. Although the zero-percent tax rate for capital gains is slated to last from 2008 until 2010, there is no guarantee. Again, always consult your accountant or CPA to test the hypothetical scenarios prior to making a decision.

Elizabeth Loda and Steven Weber are investment advisors for the Bedminster Group, a fee-only advisor providing investment and financial counsel to clients in the Lowcountry since 1997.The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. In addition, this is not a solicitation to buy or sell any securities. Furthermore, the opinions expressed are solely those of the author and do not necessarily reflect those from any other source.