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FINANCIAL PLANNING TAX TACTICS
Short-tcrm capital losses (including any short-term carryover) of non-corporate taxpayers (individuals, estates and trusts) are applied first to reduce short-term capital gains. Under Internal Revenue Code §l(h)(4) and IRC §l.(h)(6), a net short-term capital loss is then applied to reduce net long-term capital gain in the following order:
* First, to reduce long-term capital gain taxed at a maximum rate of 28 percent (collectibles gain and section 1202 gain); then,
* To reduce unrecaptured section 1250 gain, i.e., gain taxed at a maximum rate of 25 percent; and then,
* To reduce adjusted net capital gain (taxed at a maximum rate of 15 percent if taken into account after May 5, 2003, and taxed at a maximum rate of 20 percent if taken into account before May 6, 2003).
While adjusted net capital gain includes qualified dividend income for purposes of determining the maximum tax rate on adjusted net capital gain, qualified dividend income is not included in adjusted net capital gain for purposes of using capital losses to offset adjusted net capital gain.
Example 1: In the tax year ending Dec. 31, 2002, your client had net capital gain of $60,000, consisting of a net short-term loss of $40,000 and a net long-term capital gain of $100,000. Her net long-term capital gain included collectibles gain of $20,000 in the 28 percent group, unrecaptured section 1250 gain of $30,000 in the 25 percent group, and adjusted net capital gain of $50,000.
Your client's net short-term capital loss is first used to completely offset the collectibles gain of $20,000, and is then used to offset $20,000 of the unrecaptured section 1250 gain of $30,000. No part of the shortterm capital loss is available to offset any of the adjusted net capital gain of $50,000.
Effect of transitional rule for tax years that include May 6, 2003, on use of net shortterm capital loss to offset net long-term capital gain. As noted above, IRC §l(h)(4) and IRC §l(h)(6) provide that a net short-term capital loss for a tax year (including a net short-term capital loss carried over from a prior year) is first used to offset 28 percent rate gain, and then is used to offset unrccaptured section 1250 gain.
It is...