The answer is typically a tossup: Which is most resented — estate taxes or capital-gains taxes? Last year's tax cuts went a long way toward trimming estate taxes.

        But a tax-law change enacted in 1997 allows you to trim your capital-gains tax starting in 2006 — but only if you take action now, before April 15, 2002.

        That 1997 tax law created new capital-gains tax rates for investments held more than five years — 8 percent or 18 percent. But in classic confusing form, the IRS created different rules on how to qualify for the lower rates.

        Lower-income people who would owe 8 percent basically don't have to do anything.

        Everyone else needs essentially to pretend they sold and bought back their stock in 2001.

        That means they'll claim their gain so far on their 2001 taxes, pay the 20 percent now, then only be liable for 18-percent tax on gains earned after 2006.
       

New category

        Until now, the IRS has defined only short-term and long-term capital gains. If you sold an investment for more than what you paid, you would owe tax on the gain. How much depended on your income bracket and holding period.

        Short-term gains — those on investments held less than 12 months — are taxable at normal marginal income rates, such as 15, 27, 30 or 35 percent.

        Long-term gains — those on investments held more than 12 months — were taxed at 10 percent for those in the 15-percent tax bracket, 20 percent for everyone else. Long-term rates are always lower than short-term or ordinary income rates.

        But starting last year, a third category was added: Five-year gains. People who otherwise would have owed 10 percent on gains from investments held more than five years owed 8 percent.

        But those in the higher brackets won't be able to take advantage of the lower 18-percent rate until 2006, and then only on new stock purchases.

        And the clock didn't automatically reset on stocks already owned.
       

An advantage

        But there is an upside. Confusing, but beneficial. You pretend a stock you already own is a new purchase by filling out a Schedule D for 2001.

        On that Schedule D, you would pretend to have sold and repurchased on Jan. 2, 2001, the first trading day of last year.

        Say you bought 1,000 shares of Procter & Gamble in 1995 for $40 a share. Not accounting for commissions or fees, you spent $40,000. Even after P&G troubles the year before, the stock closed at $78.50 Jan. 2, 2001, and your investment would be worth $78,500.

        On that Schedule D you file this month, then, you would claim a gain of $38,500 and have to pay capital gains tax of $7,700.

        That's a big tax bite, granted. But if you plan on holding onto the stock for at least another five years, and the stock rises at about 10 percent each year, and then you sell, you'd owe $17,285.

        But if you make the “deemed sale” now, you'll save almost $1,000 in oh-so-hated capital-gains tax.

        Contact Amy Higgins at 768-8373; ahiggins@enquirer.com; or 312 Elm St., Cincinnati 45202. She regrets that she cannot reply to all individual questions.
       

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