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FOREGO CAPITAL GAIN RATES?

April 02, 2007

The Andrew Jackson you carry around in your pocket may look a bit like an aging figure skater. Don't let that fool you. Old Hickory was unbelievably tough. In a duel, he chose to wait for the opponent to shoot first. He accepted the bullet without flinching, and took all the time he needed to shoot his opponent dead.

Sometimes the Andrew Jackson strategy works in tax. For example, sometimes it pays to voluntarily pay higher tax rates on your capital gains and dividends, which are taxed at a maximum rate of 15%.

Why would you ever want to pay a 35% rate when you could pay 15%? If it gives you more deductions.

The tax law limits deductions on "investment interest" to your "investment income." Investment interest occurs when you borrow to purchase an investment, like stock, bonds or other investment property. Investment income includes interest income, but it normally doesn't include capital gains or dividends. Many folks incurred a lot of investment interest in the day-trading frenzy of the late '90s and the early part of this decade.

The tax law does allow you to elect to treat capital gains and dividends as investment income if you forego the lower capital gain rate. That can let you deduct investment interest expense that would otherwise carry forward.

Situations to consider the Andrew Jackson strategy of having your capital gains taxed as ordinary income include:

- You have more investment interest carryforwards then you are ever likely to use otherwise.

- You need the deduction right now.

- You are in the AMT "phase-out" range, where your marginal rate on capital gains and dividends is really 22%.

You make this election by including the amount of dividend and capital gain you want to have taxed as ordinary income on line 4g of Form 4952; then follow the instructions.

We will have a daily filing season tip through April 17. Collect them all!

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