COULD YOU explain how capital gains on the sale of a stock might be taxed for the 2003 tax year? And could you provide some examples that would illustrate how changes in the tax laws might create some confusion?
- C.A., Allentown, Pa.
Computing capital gains taxes used to be pretty easy.
Then came the Jobs and Growth Tax Relief Reconciliation Act of 2003, which President Bush signed into law in May. Because of the changes in the law, you have to keep your eye on several moving parts in the legal machinery.
There are, for example, old capital gains rates that apply to stocks sold before May 6, 2003. There are new capital gains rates that apply to stocks sold on or after May 6.
There also are capital gains rates that apply to stocks held for five years or more, but only if you sold this stock after Dec. 31, 2002, but before May 6, 2003.
To see which taxes might apply, and at what rates on which dates of sale, let's review three hypothetical examples.
Let's assume that our mythical taxpayer is in the 15 percent bracket. In March 1998, this person purchased 30,000 shares of PPL Corp. (ticker symbol: PPL), a gas and electric utility based in Allentown, Pa. The gains from this sale are the only income this taxpayer earned in 2003.
Here are three possibilities:
Case 1: The taxpayer sells 10,000 shares of PPL Corp. on Feb. 1, 2003. He realizes a $13,000 capital gain. Because the gain was realized before May 6, it would be taxed at the 10 percent rate.
Case 2: The taxpayer unloads another 10,000 shares of PPL on May 1. From this sale, he locks in a capital gain of $13,000. Because the stock was held for more than five years - and because the sale took place before May 6 - the gain would be taxed at 8 percent.
Case 3: The taxpayer dumps the last 10,000-share lot of PPL on May 30. Once again, the taxpayer raked in a $13,000 capital gain. This capital gain would be taxed at 5 percent, the new rate for long-term capital gains for taxpayers in the 15 percent bracket or below (taxpayers in the 25, 28, 33 or 35 percent brackets would be taxed at a 15 percent rate in this case).
"Even though the stock was held for five years, there is no qualified five-year gain tax rate after May 5, 2003," according to CCH Inc., a publisher of tax-law guides and software in Riverwoods, Ill., in a booklet titled "Investments and Distributions."
To make life easier for yourself - or your accountant - organize your records in three piles. Assemble receipts of stock sold on or before May 5. Assemble receipts for stock sold on or after May 6. And gather those "buy" and "sell" orders that would qualify for the five-year capital gains tax treatment, said Jeffrey Berdahl, a certified public accountant with Beard Miller Co., Allentown, Pa.
How can I investigate the value - and whereabouts - of a public company that's bankrupt and delisted from the Nasdaq?
- G.T. Clinton, Conn.
Visit your public library for a copy of the Robert D. Fisher Manual of Valuable & Worthless Securities or the Marvyn Scudder Manual of Extinct or Obsolete Companies.
Matthew Lubanko is a financial columnist for The Hartford Courant, a Tribune Publishing newspaper. E-mail him at firstname.lastname@example.org.