For lower income taxpayers, using a regular Federal marginal tax rate of 15%, the maximum rate on "qualified 5-year gains" will be reduced from 10% to 8%. For those whose ordinary marginal tax rates are 28% or higher, the maximum rate on these gains will change from 20% to 18%.

But there's a catch: In order to take advantage of the 18% rate, the asset to which the gain applies must have a holding period that begins after December 31, 2000. In other words, if the asset was acquired before January 1, 2001, the gain will continue to be taxed at a maximum rate of 20%.(In contrast to the 18% rate, the new 8% rate will apply to all "qualified 5-year gains," regardless of when the holding period began.)

Consequently, we should see the 8% rate apply in years beginning with 2001.However, the 18% rate will not take effect until 2006. Therefore, the majority can expect only a future benefit from this law change.

Tax Planning Tip #1

If your ordinary marginal tax bracket is likely to be 15% and you arecontemplating a sale of property which would qualify, you should consider evaluating the benefits of waiting until (a) after December 31, 2000, and (b) the 5-year holding period is achieved, to get the 8% rate.Of course, waiting could affect the market value of the asset, so this should be approached carefully.

Tax Planning Tip #2

Similarly, if you are in a higher bracket and are considering a purchase near year-end, it may pay to postpone the purchase until 2001 to lock in the 18% rate should the asset eventually be held for more than 5 years. Again, this should be examined with care. Waiting until 2001 could cause the price of the asset to rise!

HOW TO "CONVERT" PRE-2001 HOLDINGS
There is a limited opportunity for those in the higher tax brackets to convert pre-2001 holdings to qualified property, but at a price. If capital or business-use property is held on January 1, 2001 (and not sold the next day), and an election is made to convert, then the asset will be treated as being acquired on January 2, 2001 at the market value on that date (the "closing price" on January 2, 2001 for marketable securities). By making the election, the taxpayer is treated as first having sold the asset on January 2, 2001 (without an actual sale), thereby paying tax on the unrealized gain (at a maximum rate of 20%), then as having reacquired the asset on January 2 for the market value.No loss may be deducted on assets whose value has declined since acquisition, unless actually sold.

Ordinarily, it would not make sense for us to accelerate a gain into 2001 for a 2% tax reduction in 2006 or later. This contra-time-value-of-money arrangement makes the election impractical in most cases.

Tax Planning Tip #3

If you are holding an asset with little or no unrealized gain, which is expected to grow into a sizeable gain in more than 5 years, this option could work. In that case, a small (or no) tax would be paid in 2001, and the larger gain would be taxed in the future at a reduced rate of 18%. This might work very well for a business in the start-up stage at the end of 2000. In such a situation, you would expect business assets to be held for more than 5 years, and the unrealized gains as of January 2 should be minimal.

A final thought on this: After all the shuffling and prognosticating, if our government decides to lower the capital gains rate in some tax reduction bill, which is a real possibility before 2006, those who elected to accelerate income may have done so in vain.