Download Techniques for Generating Long

Techniques for Generating Long-term Capital Gains
The current preferential tax treatment of long-term capital gains is creating a significant opportunity for
individuals to lower their tax bill. Especially for taxpayers in higher ordinary income tax brackets, shifting
to investments that generate long-term capital gains rather than ordinary income should reduce taxes.
To qualify for the preferential long-term capital gain rates, the taxpayer must hold the asset for more than
12 months. The holding period generally begins the day after an asset is purchased and runs through (and
includes) the date of sale. These rules must be followed exactly, because missing the required holding
period by even one day prevents the taxpayer from using the preferential rates. By holding assets for
longer than one year, your investments are subject to the risk that their value may decline. But the
potential tax savings if you get the lower capital gain rates might minimize that risk.
It is important to keep assets that generate capital gains outside of qualified (e.g., pension or profitsharing) plans or IRAs. Distributions from those accounts are usually ordinary income, so the benefit of
the lower long-term capital gain rates may be wasted. Generally,
ordinary income assets should be held inside the qualified plan or IRA, and capital gain assets should be
held in taxable accounts. However, a careful analysis of your investment policy is necessary to determine
how to allocate investments between your retirement accounts and taxable accounts.
Finally, structuring compensation packages that generate long-term capital gain income instead of
ordinary income is clearly advantageous to taxpayers in the higher ordinary income tax brackets.
Compensating executives with company stock may appeal to the employer since it requires no cash
outlay and often motivates the recipient. If the stock’s appreciation is taxed at the long-term capital gains
rates, the executive also gains a tax benefit.
Please call if we can help explain the criteria and methods for developing long-term capital gains. We
would like to help you develop a personal strategy for maximizing the benefit of the available tax breaks.