Take Advantage of Lower Tax on Capital Gains

Long-term capital gains and qualified dividends continue to be taxed at favorable rates through 2012. For middle- and higher-income investors, these items are taxed at a maximum rate of 15 percent, a much lower rate than ordinary income. Taxpayers in the 10 and 15 percent ordinary income brackets do not pay any taxes on long-term gains and qualified dividends. Short-term gains are taxed at ordinary income rates.

To obtain long-term rates, investors must hold the asset (such as stock and most other property) for more than one year. The holding period begins on the day after you acquire the asset and ends on the day you dispose of the asset.

Example. If you bought stock on November 30, 2010 and sold it November 30, 2011, your holding period is exactly one year, and any gain (or loss) is short-term. If you instead sold the stock on December 1, 2011, your holding period is more than one year, and gains (or losses) are long-term.

Rates on long-term gains may increase dramatically after 2012, depending on the status of the Bush-era tax rates. Long-term rates will increase to 20 percent if Congress takes no further action. The Obama administration has proposed to reinstate the 20 percent rate, but only for individual taxpayers with income of $200,000 and married taxpayers with income of $250,000. To ensure that you can take advantage of long-term rates in 2012, you may want to make particular stock purchases before the end of 2011. For 2011, December 30 is the last day on which stock exchanges are open, since December 31, 2011 is a Saturday.

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