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New Capital Gains Tax Rates

Roy Lewis
June 13, 2003

One of the many changes made by the Jobs and Growth Tax Relief Reconciliation Act of 2003 includes the way capital gains will be taxed. While this change hasn't received as much press as the $400 advance child tax credit payment, it's something that will have a tremendous impact on your investment decisions.

Under the prior law, long-term capital gains (gains on those assets held for more than one year) were taxed at a maximum rate of either 20% or 10%, depending on your income. Additionally, there was also a provision in the old law that allowed for a reduced long-term gain rate of 18% or 8% if your gain was attributable to what was called "superlong-term gains."

But that's all changed now. The 2003 Tax Act reduces the old 20% rate to 15% and the old 10% rate to 5%.

So, for example, let's say you bought 1,000 shares of Microsoft (Nasdaq: MSFT  ) more than a year ago for $15 a share, and recently sold your stake for $25 a share, for a gain of $10,000. Under the old rules, the tax on that gain would have been $2,000 (assuming you're among the majority of investors whose long-term gains are taxed at the higher rate). But under the new law, the tax will only be $1,500.

Another change is that the provisions regarding superlong-term gains has been repealed and removed. There are no special 18% and 8% rates for capital assets held for the superlong-term period. For most of us, this repeal is no big deal. But for other folks who went the route of the "deemed sale election" in order to get a head start on the superlong-term gain holding period, this change cost them a few tax dollars.

When the deemed sale election was made, it was irrevocable. No