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HOLD THAT STOCK! (AT LEAST LONG ENOUGH TO GET THE 15% RATE)

June 11, 2003

Today's lesson: a great tax scheme that doesn't work - and a moral for careful taxpayers.

THE SCHEME: Taxpayer Tim has a clever plan to game the new 15% top rate on dividends. He buys a stock that reliably pays a $1 dividend the day before it goes ex dividend, paying $20 for the share. The day it goes ex-dividend the price goes down by $1 because the dividend stays with the seller. Tim sells the share for $19. Tim chuckles to himself: "I get a $1 dividend, which will cost me 15 cents in federal taxes. I get a $1 short-term capital loss, deductible in full (up to $3,000), giving me a deduction worth 35 cents at my 35% tax rate. I get 20 cents net tax savings for almost no risk! Heh!"

THE SNAG: The 15% rate only applies when a stock is held for at least 60 days during the 120-day period starting 60 days before the ex-dividend date and ending 60 days after the stock goes ex-dividend. If the holding period requirement is not met, the dividend is taxed at regular rates. Preferred stock must be held for 90 days out of a 180-day period.

THE MORAL: Taxwriters think a step or two ahead. Sometimes. If it seems too easy, maybe it doesn't work. Watch your sale dates; if you flip a stock too quickly, you won't get the 15% rate.

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