Happy New Year! Get Ready for the Cut in Capital Gains Tax

The capital gains rates are dropping.

Well, not until Jan. 1. But the rates will drop 2% on any capital gains generated from assets held for more than five years. And while it's too early to do anything, there are some matters you should be aware of that can shrink your tax bite down the road. So consider this a sneak peek at the rules and some planning techniques.

The immediate benefits of the rate drop will depend on your tax bracket. As an example, for 2000, income taxpayers qualify for the 15% bracket if their taxable income is less than $26,250 as a single person or less than $43,850 if they are married filing jointly. Typically, if you're in this bracket, long-term capital gains are taxed at 10%. But starting Jan. 1, any gains from the sale of property held more than five years will be taxed at 8%. So if you sell something you've held for at least five years on Jan. 2, 2001, you would owe only 8% on any profit.

Taxpayers with higher taxable incomes fall into the higher brackets. They pay 20% on their long-term capital gains. For these taxpayers to take advantage of the rate drop, the rules are more stringent: Any assets purchased after Jan. 1 and held for five years will be taxed at 18% if sold at a gain. So taxpayers in this bracket won't really feel the effect of the decrease until 2006. ...