Plan Ahead for the '00 Tax Crunch
How to minimize taxes and maximize profits on your investments, plus the benefits of charitable deductions

WITH 1999 going down in history as the year the Dow soared beyond the magic 10,000 mark, there's a good chance your own portfolio registered all-time highs, too. Before you count your new-found riches, though, make sure you're tax smart when you manage the capital gains, or you'll find yourself writing out a record-sized check come next April. It's not how much you make that counts, it's how much you keep.

Some basic definitions

A capital gain is the profit you realize when you sell stock or other capital assets that have appreciated in value. The tax treatment of a capital gain or loss depends on how long you own the asset before you sell it. Gains or losses on the disposition of assets you've held for longer than 12 months are treated as long-term gains or losses, which means the gains are taxed at a more favorable maximum rate of 20 percent (10 percent for taxpayers in the 15-percent tax bracket). Gains or losses on the disposition of assets you've held for 12 months or less are viewed as short-term gains, whereupon the gains are generally taxed at a higher rate, that is, whatever you're currently paying on ordinary income. Thus, these rates can range from 15 percent to 39.6 percent.

Not all growth funds are created equal

Buying growth stocks or growth mutual funds can be advantageous because most of your returns come from capital gains, unlike returns on income stocks and funds which come mainly from dividends and interest. Here is the key difference: income from dividends and interest is taxable at ordinary income tax rates.

Keep in mind that growth funds -- that is, groups of assets managed by a single company or individual -- lack some of the tax advantages enjoyed by growth stocks. Every year, the fund has to pay you a pro rata share of any net capital gains it earned when it sold securities. You then must pay taxes on those gains. Therefore, when buying a fund, check its tax-efficiency ratio -- the percentage of total return that an investor keeps after taxes. The higher the ratio, the better it is.

Use the right basis

To calculate the profit you made on your stocks or mutual fund shares, subtract your basis (the cost of the shares plus any up-front sales fees) from the proceeds of the sale. If you bought your shares all at once and then sold them all at once, the math will be a snap. However, if you bought your shares in blocks or by reinvesting dividends, or if you sold only a portion of your shares, figuring your basis can be a lot more complicated. For stocks, you need to figure out your gain for each block of shares purchased at different prices. With mutual funds, you can take the easy way out and use the average basis, which most mutual fund companies now report to you on an annual statement you generally receive in February. However, if, in order to reduce your taxable gain, you chose to sell a group of shares you bought at a higher price, use the actual cost of the shares that you instructed the fund to sell, not the average basis. For this method, you must have specified to your broker or other agent the particular shares to be sold at the time of the sale and have received written confirmation of your specification.

The skinny on charitable gifts

For the charitably inclined, the end of the year often brings an outpouring of opportunities to make charitable donations. Whether it's a solicitation from your alma mater or a request from your church, writing a check is the easiest way to donate. But there are a number of other ways you can help your favorite charity and benefit your own tax situation as well.

Give appreciated assets

While a check may be the easiest, non-cash gifts can give a charity more and cost you less. The next time you plan to make a sizable donation to your favorite charity, review your portfolio to see if there are any securities that have appreciated in value that you could donate instead. Giving stock instead of cash is an excellent way for you to save on taxes while benefiting your charity of choice. Under current law, when you donate appreciated property held longer than one year, you can write off the full fair market value of your donation, plus you don't owe any capital-gains tax on the profit you would have realized if you sold the asset.

Set up charitable trusts

A charitable trust can be a valuable tool for people planning substantial donations. In the case of a charitable remainder trust, you donate (on an irrevocable basis) cash or property to the trust and you, a family member or other beneficiaries receive income from the trust for a set period of time, or for as long as you live. At the end of that time period, the property passes to the charity. When you establish a charitable remainder trust, you receive a current deduction for the present value of the gift that the charity will receive in the future and you receive a continuing stream of income from your property. However, since the Taxpayer Relief Act of 1997 tightened regulations concerning charitable remainder trusts, you might want to consult a CPA before establishing one.

A charitable lead trust is the opposite of a charitable remainder trust. You donate cash or property to a trust and the charity gets the income while you're alive. Then, at your death, the assets revert to your estate. In the meantime, you receive an up-front deduction for the value of the income stream that will go to the charity.

The above column was provided by the Kentucky Society of CPAs. For more information about personal finance, income taxes or business issues, visit their website at www.kycpa.org.

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