Business News & Tips Alan S. Moore / L’Observateur / February 17, 1999The volatile securities market makes tax planning especially challenging for today’s investors. For this reason, it’s important to focus on how tomake the best use of any losses, paper or actual, from your stock market investments. In addition, be sure to plan for the changes included in theInternal Revenue Service Restructuring and Reform Act of 1998 (the “’98 Act”) and the provisions of the Taxpayer Relief Act of 1997 (the “’97 Act”) which became effective in 1998.

Published 12:00 am Wednesday, February 17, 1999

You should keep in mind that the ’98 Act reduced the minimum holding period for long term capital gains to “more than 12 months” from “more than 18 months” retroactive to January 1, 1998. Therefore, any gains youtake from securities held more than 12 months will be taxed at the 20% maximum tax rate (10% for persons whose income remains in the 15% tax bracket including the gain).

If you take gains early in the year, you should look through your portfolio for securities in which you could take a loss. The best strategy is to sellenough losers to shelter your gains and generate a $3,000 excess loss which can be used to offset ordinary income. Don’t forget any capital losscarryovers from prior years. (Any unused capital losses may be carriedforward for an unlimited time.) And remember, sales are recognized ontrade date and Dec. 31 was the last trade date in 1998.The wash sale rule disallows declaring a loss on the sale of securities where a purchase of the same or substantially identical securities is made within 30 days before or after the sale. Therefore, you should wait31 days before you repurchase the same stock.

To take a loss in a mutual fund, you can sell the original shares and buy shares in another fund within the same family often with no additional sales charges. Always consult the prospectus for more details. CAUTION: Don’t buy just before the fund pays a dividend because you may pay tax on what is nothing more than a return of capital. Also, as a result of anautomatic reinvestment plan, a shareholder may get hit by the wash sale rule if they sell shares at a loss.

The ’97 Act changed the taxation of a gain on the sale of a principal residence to exclude $250,000 of the gain ($500,000 if you are married and file a joint tax return) if you owned and used the residence for at least two of the prior five years. If you fail the two year ownership anduse test because of a change in place of employment, health, or unforeseen circumstances, a fraction of the excludable amount can be excluded. The’98 Act makes it clear that the fraction of the two year period that the property was owned and used times the maximum excludable amount is used to reduce the gain.

Don’t overlook the opportunity to contribute to an IRA. You can eithercontribute to a Traditional deductible or non-deductible IRA or to the new Roth IRA. You can also choose whether or not to convert an existing IRA toa Roth IRA. 1998 contributions can be made up to April 15, 1999 and 1999contributions can be made starting January 1, 1999. Remember, the earlieryou contribute, the sooner you begin to accrue tax-deferred or tax-free income. You may contribute up to $2,000 of earned income to anycombination of IRAs.

The ’98 Act allows taxpayers who converted to Roth IRAs in 1998 to report the income evenly over a four-tax-year period beginning in 1998 or to elect to have the entire conversion amount taxed in 1998. However, ifyou withdraw money during the four-tax-year period the income tax will be accelerated.

New rules have been issued by the IRS that restrict the number of times you may reconvert to a Roth IRA and also change the taxable conversion amounts. You may reconvert one time on or after November 1, 1998 and onor before December 31, 1998 and one time in 1999. Any additionalreconversions will be treated as valid; however, the taxable amount will be determined based on the first reconversion in each time period. Anymultiple reconversions prior to November 1, 1998 will be grandfathered and are eligible for the one additional reconversion in 1998 and one in 1999.

If you are planning a gift to a public or private charity, consider giving appreciated property held long term-a great savings device. You willreceive a charitable deduction (subject to limitations) for the full fair market value of the property at the time of the gift and will not be taxed on the appreciation. Choose the stock carefully and do not give stock thathas declined below your cost basis. It would be better to sell that stock,use the tax loss and donate the cash.

You should consider gifting any assets which are expected to appreciate, including stock that has recently declined, rather than gifting highly appreciated assets from your estate. In this manner, you remove assetswith future appreciation and retain assets whose cost basis will be “stepped-up” to fair market value at death. There is a $10,000 annual gifttax exclusion ($20,000 with spousal consent) per recipient. Gifts in anyyear that exceed the annual exclusion will be charged against the unified credit. Each taxpayer can give during life or leave at death a total of$625,000 (1999 exemption equivalent) of assets tax-free beyond the annual gift tax exclusion. There is no carryover of an unused giftingexclusion.

When it comes to your investments, don’t overlook the opportunity to reduce your tax liabilities and improve your investment opportunities.

Please consult your tax and or legal advisor about your personal situation.

(Alan S. Moore is a financial advisor at Legg Mason Wood Walker, Inc., asecurities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC.)

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