New legislation affects capital gains holding period and roth IRAsALAN MOORE / L’Observateur / August 5, 1998On July 22, 1998, President Clinton signed the Internal Revenue Service Restructuring and Reform Act of 1998 (the “Act”) which contains a lot more than its title suggests…For starters, the Act includes a provision that reduces the long-term capital gains holding period from “more than 18 months” to “more than 12 months” for non-corporate taxpayers eliminating the complex holding period requirements introduced by the 1997 tax law. Effective for assetssold or exchanged on or after January 1, 1998, the provision eliminates the requirement that capital assets must be held more than 18 months in order to qualify for the 20 percent maximum capital gains tax rate.
Instead, assets must be held more than 12 months in order to qualify for the 20 percent tax rate (10 percent for taxpayers whose taxable income, when including the gain, remains in the 15 percent tax bracket). For assetsheld 12 months or less, the rate remains the same as your income tax rate, up to 39.6 percent.Mutual fund shareholders need to be aware they may not benefit from the simplified holding periods this year. Some 1998 mutual funddistributions may be subject to the 1997 tax law holding period requirements.
Additionally, the legislation includes a provision which allows more taxpayers age 701/2 or older to convert Traditional IRAs into Roth IRAs.
Traditional IRAs require a minimum distribution when an IRA beneficiary reaches age 701/2. Under current law, individuals and married coupleswith adjusted gross income (AGI) in excess of $100,000 cannot roll their Traditional IRA into a Roth IRA. The legislation changes existingprovisions by excluding the minimum distributions in calculating the $100,000 income test. This means more opportunity to pass on the RothIRA benefits of tax-free earnings and qualified withdrawals to their heirs.
The provision is effective for tax years beginning after December 31, 2004.
As you can see, the new legislation offers some interesting new provisions which can effect your tax status. Consult your financial and taxadvisors for more information.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a securities brokerage and financial servicesfirm and member of the New York Stock Exchange, Inc. and SIPC.)
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