Plan Now for Tax Relief.

• Author: JOSEPHS, STUART R.
• Position: Planning for implementation of the Taxpayer Relief Act in 2001 - Brief Article - Statistical Data Included

The 1997 Taxpayer Relief Act reduced the long-term capital gain tax rate imposed on noncorporate taxpayers for regular and alternative minimum tax purposes after 2000. This tax relief applies to gains recognized on the sale or exchange of certain capital assets [IRC Sec. 1(h)]. The top rate for gains on assets purchased after 2000 and held for more than five years will be 18 percent, instead of 20 percent. For taxpayers in the 15-percent bracket, the maximum rate will be 8 percent, instead of 10 percent, for post-2000 gains on assets held for more than five years-regardless of when the holding period begins.

NEW ELECTION

A taxpayer holding a capital asset or an asset used in the taxpayer's trade or business on Jan. 1, 2001 may irrevocably elect to treat the asset as sold for its fair market value (FMV) and re-acquired for the same amount [1997 Act Sec. 311(e)]. If this election is made, any deemed gain must be recognized but any deemed loss is disallowed. The election avoids transaction costs, such as sales and purchase commissions, that would be incurred if stock or other eligible assets are sold and then repurchased.

ELECTING OR NOT ELECTING

The following are factors for making this new election:

* An asset with no or only insubstantial appreciation on Jan. I, 2001 is expected to be held for more than five years and also is expected to appreciate.

* There are losses incurred in, or carried to, 2001 which would offset the deemed gain, and these losses would not otherwise be used to offset other gains.

The following are factors for not making this election:

* The deemed gain would precipitate a substantial 2001 tax, since the election will only save 10 percent of the capital gains tax, equal to only 2 percent of the gain, that otherwise would be incurred (at, for example, the usual 20-percent rate compared to the elective 18-percent rate).

* A noncorporate taxpayer is in the 28-percent or higher bracket in 2001 but would be in the 15-percent bracket if and when the asset is sold after being held for more than five years. In this situation, gain would be taxed at 20 percent in 2001, which otherwise would be taxed at 8 percent.

In any event, in deciding whether or not to make this election, taxpayers also must consider the after-tax time value of money.

TAX PLANNING

Subject to financial factors such as market conditions and the after-tax time value of money, taxpayers considering selling appreciated assets should sell them in 2001 instead of...