MainBanner JavaFiller
quote.fool.comToday's FeaturesQuotes, News, Charts, Data

We'll burn that bridge when we come to it. -- Matt Goukas

Budget Negotiators Agree on Capital Gains Tax Plan
What Does This Mean?

Well, it looks like the Republican budget negotiators and the Democrats, led by the White House, have finally agreed on a capital gains tax plan. Although the accord does not index capital gains taxes to inflation, it does result in significant tax savings for any American who owns a house, stocks, or mutual funds.

According to the newswires, long-term capital gains taxes will now be taxed at a markedly lower rate than the prevailing 28%. If you hold something from one to five years, your capital gains tax rate will now be 20%. If you hold something for more than five years, you will now benefit from a "super" long-term of 18%. Assets held for one year or less would be taxed at the taxpayer's "normal" tax rate. If this is the case, the legislation would create a "super long-term" holding period for assets held more than five years. Additionally, those in the 15% income tax bracket will now only pay 10% on long-term capital gains. Although this may not seem like a big deal, as few in the 15% income tax bracket have significant stock portfolios, many do own homes.

Although many high-income individuals will benefit from these tax cuts, investors should recognize these capital gains cuts will actually help middle-class investors as well. The current long-term capital gain rules allow assets held for more than one year to be taxed at a taxpayer's normal rate, or 28%, whichever is less. Therefore, for many individuals whose "normal" tax rate was 28% or less, there was very little "tax" difference between short- and long-term gains. Until now, the only people who truly received tax relief for holding long term were those who were in the 33% and higher income tax brackets. If this negotiated plan actually makes it into law, the impact to the average investor in the 28% tax bracket or below could be significant.

So...what will this mean to you, assuming these proposals make it into law?

If you were to realize a $50,000 gain on the sale of stock held over a five-year period, your tax liability on that gain (under the new provisions) would total $9,000 compared to $14,000 under the old rates. That's a $5,000 tax savings. Even if you held the shares more than one year but less than five years, your tax would be only 20% of the gain, or $10,000. This still represents a $4,000 tax savings. If your normal income tax rate was only 15% and you were to recognize a $50,000 gain, you will be taxed only $5,000 instead of the $7,500 you would have had to pay under the old legislation.

On a $50,000 taxable gain:         BEFORE   AFTER

Income tax 28%+, held 5 years+    $14,000   $9,000
Income tax 28%+, held 1-5 years   $14,000  $10,000
Income tax 15%                     $7,500   $5,000

As you can see, this deal represents real tax savings for investors in all tax brackets -- not just for those in tax brackets above 28%. Although many commentators may paint this tax reform as more savings for the rich, it really puts more money into the pockets of anyone who owns stock, mutual funds, or a house, unlike the current capital gains tax law. Investors should be excited about this development.

© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us