Got long-term stock gains and losses? Lucky you

That is, if you decide to sell your Systems shares and your Corp shares. The decision to sell may include things other than taxes -- namely, if you think the stock will go up or down.

My one thought on that decision is this: You can't go broke taking profits.

To have these the transactions reflected on your 20089return, you have to have sold and closed them by Dec. 31, 2009.

Understand the subtleties of basis

Capital gains have some subtleties that may affect how you deal with your stocks. Let's start with two issues on basis.

• Your mother gave you the 100 shares of Inc. She paid $10 for the shares and gave them to you when the stock was at $60. This is bad news. If you receive an asset by gift, you take the basis of the person who gives you the asset. Technically, it's called a "substituted" basis. In this case, it's $10. So you now face a double insult: The stock has fallen from $60 to $28, but you still face a capital gain if you sell.

• Your mother died on Nov. 15, 2009, and left you 100 shares of Boom. She bought those shares at $20. The stock was worth $54 when she passed away. Now you get what's known as a "stepped up" basis. That means that your basis is usually the fair market value of the property as of the date of her death of the donor. (And that value is calculated by averaging the high and low price for the stock on the date of death.)

Only the gain over that amount is taxable. That means that all of the appreciation from the original purchase to the date of death escapes taxation.

The bottom line: Your basis in Boom is $54 a share. Now you don't have a capital gains issue.

So the easiest way to completely avoid any capital gains on any of your appreciated investments is to, well, die. That may be carrying tax planning a little too far.

However, it does open planning strategies worth considering. Here are some of them:

Taking it with you

• You're ill and don't expect to live long. Don't start giving away your appreciated property now. If you do, you pass on your basis, too. That leaves the recipients vulnerable to massive gains when they sell. On the positive side, your holding period would be tacked on to theirs. So, if between you and your beneficiary, the property would be held more than a year, all gains would be long-term capital gains -- subject to that maximum 15% tax rate from the 2003 tax law.

• Your beneficiary receives the property upon your death. Now, there has been NO TAX on the appreciation during your lifetime. And even if your heir sells the assets in two weeks, all potential gain from appreciation after your death would be long term, subject to the 15% maximum tax.

Of course, if you have a short life expectancy, sell any investments that have decreased in value and capture the loss deduction before it fades with your death. If you want to see smiles on the faces of your beneficiaries before you go, then gift the proceeds of loss sales or transfer assets that haven't increased in value.

Let's deal with one last issue:

If you're in the 15% or lower income tax bracket, your long-term capital gains are taxed at zero. For 2009, if your taxable income is $33,950 or less ($67,900 on a joint return), you qualify. Add a personal exemption of $3,650 and a standard deduction of $5,700, and you can have as much as $43,300 ($86,600 on joint returns) and pay zero on long-term capital gains.

Updated Nov. 24, 2009

< previous |  1 | 2 |