New Tax Law Will Affect the Capital Gains Levy on Stock Held in Teenager’s Name
Q: My teenage son holds stock that has appreciated considerably over the years. It was our intention that proceeds from the sale of the shares would be used to fund his college education.
When we purchased the shares years ago, we had thought that we would sell them on his behalf gradually, making sure the income did not exceed the threshold of the 15% tax bracket. But now, with the new tax law, it would seem these proceeds are subject to a capital gains tax of 20%, regardless of his tax bracket or how much stock is sold.
We are confused. What tax rate will be applied to his gain from the sale of stock held for more than 18 months? --A.C.P.
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A: Under the new tax law that took effect last year, taxpayers in the 15% marginal tax bracket are subject to a 10% capital gains tax on the sale of assets held 18 months or longer. Taxpayers in higher tax brackets are subject to a long-term capital gains tax rate of 20%.
Gains on assets held for less than 18 months are taxed at the taxpayer’s marginal ordinary tax rate. If that had been your son’s case, it would be 15%, since that is his tax bracket.
Does your son qualify for the 15% tax bracket? For 1997, taxpayers with taxable income of up to $24,650 made the cut. The ceiling should rise somewhat for 1998, but that threshold has not yet been published.
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Q: I have bought some utility stocks directly from the com-pany, taking advantage of a 5% discount the company offers shareholders who reinvest dividends back into the company. The company also offers the same discount for shares purchased by stockholders through an optional cash investment. Are there any drawbacks here?--H.P.H.
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A: Although people like me are fond of noting that there are no free lunches in this world and that things that seem too good to be true usually are, this is one instance in which this outlook doesn’t apply.
Your utility company is offering you a 5% discount to continue investing in its operations. You’re taking advantage of it, much as you would a double coupon offer by your local supermarket. Just remember that your tax basis in the shares is exactly what you paid for them, not their actual market value on the date of purchase. If there is a downside to this deal--and this hardly qualifies as a downside--it’s that the 5% discount is subject to taxable gain when you sell the shares.
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Q: My wife and I know very little about opening an individual retirement account, whether it’s a traditional one or a Roth. What do we do? Can any bank or stockbroker help us open one? --F.L.
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A: Any bank, thrift association or stockbroker is well-equipped to handle your application for a traditional IRA or one of the new Roth IRA accounts. By now, the procedures should be virtually automatic for these offices, so your job is to decide how you want your retirement money to be invested and to seek out the best possible institution for your account.
First, decide whether you want to put the money into bank investments, such as certificates of deposit, which are government insured up to $100,000 but tend to pay lower returns in exchange for that safety net, or into other investments, such as mutual funds, which offer a greater potential for returns but also far less security for your principal.
If you are as much of a novice as you make it seem, your first step should be to educate yourselves on your choices. There are literally scores of books on the market today that explain the choices that await you. Visit your local bookstores and browse through the business and finance sections.
You also might consider visiting the electronic bookstores on the Internet, including Amazon.com and Barnes & Noble. Both offer the widest possible assortment of titles for purchase directly over the Web.
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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, or e-mail carla.lazzareschi@latimes.com.
