New Capital Gains Rule Puts a Premium on Calculating How Long Assets Were Held
Q At the end of last year, I sold stock that I had held for varying amounts of time. Many of the shares had been purchased through a dividend reinvestment program over the last 10 years. How does the new capital gains tax structure affect my tax obligation on the profit I realized from the sale?
--C.M.
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A I hope your records are complete, because you will need good records to figure taxes owed.
Basically, you must divide the shares you sold into three groups: those you held for longer than 18 months, those held for 12 to 18 months, and those held for less than one year.
The shares held for 18 months or more are subject to a maximum tax rate of 20% (just 10% if you’re in the 15% income tax bracket). Stock held for 12 to 18 months is subject to a 28% tax rate (15% if you’re in the 15% income tax bracket). And stock held for less than 12 months is taxed at your prevailing ordinary income tax rate, up to a maximum of 39.6%.
Your job is to determine how many of the shares you sold fall into each group. Then, figure out your taxable gain based on the difference between the prices you paid for the shares and the price for which you sold them. Then, apply the applicable income-tax rate.
The math isn’t complicated. The trick is maintaining accurate and complete records of your dividend reinvestment purchases. If your records aren’t complete, contact the company’s investor-relations office--the sooner the better.
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Q I recently sold $4,000 worth of a mutual fund in my young daughter’s account. I had purchased the fund about five years ago for $1,500 and had reinvested the dividends and capital gains. Every year, her taxable income was less than the $600 that minors are allowed to get tax-free each year. Does she have any tax liability for the $2,500 gain in the value of her fund?
--F.H.
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A Assuming that you have kept adequate records demonstrating the gradual gain in the value of your daughter’s investment, she should not face any tax consequences from the sale of the mutual fund stake. You will have to file a tax return for your daughter for the proceeds from the sale.
You should show the proceeds on Schedule D. Your tax basis in the investment is its original cost plus your annual reinvestment of the dividends and capital gains. If you want to make doubly sure, attach a note detailing the annual rise in the fund’s value to demonstrate why the proceeds are not taxable now because they were accumulated in amounts too low to be taxed in an individual year.
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Q Are transfers from traditional individual retirement accounts to Roth IRAs to be handled any differently from Roths you open from scratch? I seem to have seen something suggesting that you can’t mingle a Roth rollover with funds in a straight Roth IRA. May I roll over a stock brokerage account from a traditional IRA to a Roth?
--D.G.
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A It is correct that you should not mix money transferred from a traditional IRA to a Roth IRA with money deposited directly into a new IRA. Why? Because language in the bill creating the new Roth IRA suggests that Congress wants us to track the Roth rollovers separately from pure Roth IRAs. It shouldn’t be that big a deal for taxpayers or institutions offering Roth IRAs. You’ll have one Roth IRA for any traditional IRA transfers and another for new annual contributions.
There is no legal reason preventing taxpayers from transferring IRA brokerage accounts to Roth IRA brokerage accounts. It will be up to your brokerage to tell you if it allows the moves. Most, if not all, probably will. Just remember: When you transfer the stock in your IRA to a Roth IRA, you will have to pay taxes based on the value of the shares on the date of the rollover. The stock will not carry your original tax basis into the Roth IRA.
Carla Lazzareschi will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
