Nice article about the new capital gains rates. One question: If I have held stock for more than five years, can my wife and I give a total of $20,000 of that stock to my child on Jan. 1, 2001, sell it the next day, and secure the 8% rate? (Assuming, of course, that my child is not taxed at my rate -- age 14 or older, right? -- and has less than $26,250 in income for 2000).
The Wall Street Journal recently stated that this was possible in its front-page "Tax Shorts," but I want a second opinion. -- Will Carter
If you're looking for a second opinion, you've come to the right place. And the second opinion agrees with the first one.
Thanks to a taxpayer-friendly election included in the
Taxpayer Relief Act of '97 , the capital gains rates are dropping in 2001. Taxpayers in the lowest 15% tax bracket will be the first to benefit from this decrease. If you qualify for this tax bracket in 2000 -- your taxable income is less than $26,250 as a single person, or less than $43,850 if you file married filing jointly -- then starting Jan. 1, any gains from the sale of property held more than five years will be taxed at 8%. Typically, long-term capital gains are taxed at 10% for people in this bracket.
Taxpayers in the higher brackets will see a drop in their capital gains rate from 20% to 18% on any assets purchased
Jan. 1 and held for five years, but these taxpayers won't really feel the effect of the decrease until 2006.
Assuming you still have appreciated assets (ha!), now is a great time to give them to a child who's aged 14 and in the 15% bracket. Kids under 14 are taxed at their parents' income tax rate.
Remember, a married couple annually is allowed to give up to $20,000 to any person without incurring gift tax. "So you don't want to make a taxable gift," said Martin Nissenbaum, director of income tax planning at
Ernst & Young
, "but to the extent that you're using your annual exclusion, it makes a lot of sense to do this now."
Your teenager receives your holding period with the gift, therefore, if you give your daughter shares you've held for four years, she would only have to hold them another year to qualify for the lower, long-term rate. However, in your case your teenager could sell the shares immediately and qualify for the 8% rate.
Because she's the one selling the shares, she gets to keep the proceeds -- so be careful. Consider not telling her you're giving her assets, suggests Nissenbaum. You can sign her return until she hits 18 anyway, and what she doesn't know won't hurt her.
To be safe, consider putting those assets in a trust or setting up a
Uniform Transfers to Minors Act
account. Either way, be sure to talk to your adviser.
How Do I Elect Trader Status?
I'm a full-time trader in 2000 and would like to elect trader status on my tax return. Is there a deadline, or do I just elect it on my 2000 tax return when I file? -- Brian Hruz
The only way the
Internal Revenue Service
knows you're a trader is by the way you complete your tax return, so technically, your deadline to file as a trader is the day you file your tax return. Unless you decide you want to mark your trades to market. In that case, then, you must have made the election on your 1999 tax return -- but we'll get to that in a minute.
There are a few distinctions that make a trader's tax return look different from, say, mine.
As an example, trading-related expenses are considered ordinary business expenses and are 100% deductible on
-- Profit or Loss from Business
. Ordinary investors -- like me -- can only deduct investment-related expenses in excess of 2% of their adjusted gross incomes, and they must be reported on
-- Itemized Deductions
For more details on how to make your tax return look like a trader's, check out this
piece from our
Taxes for Traders series.
The other big perk to filing as a trader is the option to elect to mark your trades to market, which allows traders to value their securities as if they were sold for fair market value on the last business day of the year. Making this election also permits traders to report an unlimited amount of losses on Schedule C. (Remember, the rest of us are limited to a maximum of $3,000 in net losses reported on
-- Capital Gains and Losses
.) While this would've been a great year to mark to market, because losses abound, you were required to have made your 2000 election on your 1999 tax return. If you did not make this election in '99, you cannot mark your trades to market in 2000. If you decide you'd like to do so in 2001, remember to make this election on your 2000 tax return in April.
Check out this
column for more details on the deadlines for this election.
Changed Your Name? Better Tell the Social Security Administration
Does your name match your Social Security number? If you changed your name without notifying the
Social Security Administration
, it most likely does not.
If it doesn't, you're probably one of the 2.4 million taxpayers getting a tsk-tsk letter from the IRS telling you to fix the problem before you file your tax return in April. If you don't rectify it, your refund may be held up or you may be denied either the earned income tax credit or the personal exemption a spouse gets when a couple files jointly.
This push is an effort to reduce fraud, although most of the discrepancies involve women who took their husbands' name when they got married, according to the IRS.
The proper documents (i.e. marriage certificates) can be mailed to the Social Security Administration, but they must be originals, not copies. The administration will return them to you when it is finished with them. I advise you go to your local office and take care of it in person.
Check out the Social Security Administration's
Web site for more information.
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TSC Investor Forum aims to provide general investment information. It cannot and does not attempt to provide individual advice. All readers are urged to consult with a professional as needed about their individual circumstances.