New Long-Term Capital Gains Rules for 1997
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| New Long-Term Capital Gains Rules for 1997 | |
For tax year 1997, new rules have been implemented on the treatment of long-term capital gains, for transactions occurring after May 6, 1997. These changes include an increase in the assets holding period and a decrease in the tax rate. The new rules apply to individuals, estates and trusts, and are based on a taxpayers adjusted net capital gain. Unrecaptured gain on Sec. 1250 property, the exchange of collectibles and gains on Sec. 1202 stock do not qualify.
A favorable change is the reduction of the tax rate. Previously, long-term capital gains were taxed at a maximum rate of 28%; under the new law, the rate is reduced to 20% (10% if the taxpayers marginal tax rate is 15%). There is also a special provision for purchases after Dec. 31, 2000. Generally speaking, if a taxpayer purchases an asset after this date and holds it for at least five years, the tax rate is further reduced to 18% (8% if the taxpayers marginal tax rate is 15%).
In determining whether a taxpayer is eligible to use the reduced tax rate, it is important to ascertain when the asset was sold, as well as its holding period. If the asset was sold prior to May 7, 1997, the old rules apply and the taxpayer is taxed at the prior maximum rate of 28% (15% if the taxpayers marginal tax rate is15%).
If the asset is sold after May 6, 1997, the taxpayer may take advantage of the rate reduction if the taxpayers holding period qualifies. For sales of assets after July 28, 1997, the holding period for long-term capital gains has been increased from 12 months to 18 months. If an asset is sold after July 28, 1997 and was held for 18 months or longer, the taxpayers capital gain is taxed at a rate of 20% (10% if the taxpayer is in the 15% marginal tax bracket).
If the asset is sold after July 28, 1997 and is held more than 12 months but less than 18, the taxpayer does not qualify for the reduced rate and is taxed at the prior maximum rate of 28% (15% if the taxpayer is in the 15% bracket). This scenario is known as a "midterm gain." If an asset is sold before July 28, 1997, but after May 6, 1997, the taxpayer is still eligible for the reduced rate of 20% if the taxpayer held the asset for at least 12 months. The following examples illustrate the new tax law and the important role the sale date and holding period play in determining a taxpayers long-term capital gains tax rate for 1997.
Example 1: S sold stock on May 5, 1997, which resulted in a $1,000 long-term capital gain. S originally purchased the stock on March 1, 1996. For 1997, he falls into the 36% bracket. Because S sold the stock prior to May 7, 1997, the new capital gains rate of 20% does not apply. However, because the stock was held for more than 12 months, the gain is taxed at 28%.
Example 2: Assume the same facts as in Example 1, except that S sold the stock on May 10, 1997. S can take advantage of the 20% rate because the transaction occurred after the effective date and the asset was held more than 12 months.
Example 3: Assume the same facts as in Example 1, except that the asset was purchased on Jan. 1, 1996 and sold on Aug. 9, 1997. S receives the 20% long-term capital gains rate because the transaction occurred after July 28, 1997 and the asset was held more than 18 months.
Example 4: Assume the same facts as in Example 1, except that the asset was purchased on July 1, 1996 and sold on Sept. 9, 1997. Ss long-term capital gains rate will be 28% because the transaction occurred after July 28, 1997 and the holding period did not exceed 18 months.
FROM TRICIA MAKRIANIS, CPA, GRAY, GRAY & GRAY, BOSTON, MASS.
