A 0% Capital Gains Tax Could be in Your Future

The 2003 tax act reduced the long-term capital gains rate to 15% for anyone in the 25% or higher bracket and down to 5% for taxpayers in the 10%-15% brackets.
These rates will remain effective through 2007. In 2008, however, another
change emerges when the capital gains tax falls to 0% for individuals in the 10%-
15% brackets. This presents some money saving opportunities for you if you are
considering giving assets to anyone in a lower tax bracket, such as children or
grandchildren.

For example, suppose you own a mutual fund that you want to use to help
your grandson when he starts college in 2008. If you are in a high tax bracket,
you will have to pay 15% on any gains that you realize on the fund?s sale.
The IRS specifies that when you give an appreciated asset, the donee
receives the gift at your cost basis. Therefore, any untaxed profit is passed on
with the asset and taxed based on the donee?s tax bracket when sold. So if your
grandson sells any of the gifted shares between now and the end of 2007, he will
have to pay at least 5% on the profits.

On the other hand, you could hold off
giving him the fund until 2007 and have him keep the account for at least one
year. As long as he liquidates the fund in 2008, he will have a good chance of
avoiding the capital gains tax. However, based on present law, if he does not
sell out until 2009, he could face a 10% capital gains tax.