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Tax Newsletter
February 2002

Tidbits and trends 2001 2002
Standard mileage rate (cents per mile) 34.5 36.5
§179 deduction $24,000 $24,000
§401(k) annual limit on elective deferrals $10,500 $11,000
Social security wage base $80,400 $84,900
Annual gift tax exclusion $10,000 $11,000
Lifetime Exemption $675,000 $1,000,000

Capital gains. Although the stock market has recovered a large portion of its prior decline, many investors have substantial realized capital losses during 2001. In order to evaluate the tax consequences of transactions involving capital assets, taxpayers must go through a “netting” process with respect to their capital gains and losses:

  1. Offset short term capital losses against short term capital gains. (See chart)
  2. Offset long term capital losses against long term capital gains.
  3. If the results of steps 1 and 2 both result in gains, net short term capital gains are taxed at ordinary income rates; net long term capital gains are generally taxed at a 20% rate.
  4. If the results of steps 1 and 2 both result in losses, a total of $3,000 of such loss may be used to offset ordinary income in the current year. The balance of the loss is carried forward to future years.
  5. If the results of steps 1 and 2 result in a net loss in one category and a net gain in the other, the loss may be offset against the gain:
    • If the result is a net gain, a net short term gain will be taxed at ordinary income rates; net long term capital gain will be taxed at the 20% rate
    • If the result is a net loss, a total of $3,000 of such loss may be used to offset ordinary income in the current year. The balance of the loss is carried forward to future years.

Mutual Funds. Many investors have money invested in mutual funds. Carefully maintained records are important to establish tax basis and to determine holding period. Retention of monthly statements allows investors to keep track of reinvested dividends and capital gains, thereby facilitating basis calculation when the shares are sold. In addition, it is important to keep track of monies drawn on mutual fund accounts, as each withdrawal may represent a taxable redemption of mutual fund shares.

Please feel free to contact us should you have any questions regarding the foregoing.

Type of Gain/Loss Holding Period Tax Rate
Short Term Capital Gain 12 Months or less Individual ordinary tax rate
Long Term Capital Gain Longer than 12 months 20%
  Held greater than 5 years 18% applies to capital assets acquired after 1/1/01 and held for 5 years, or for which an election was made retroactive to 1/1/01.4
Short Term Capital Loss 12 Months or less Loss is deductible on a dollar-for-dollar basis against net short term capital gains. Any excess short term capital loss is deductible against net long term capital gain. If this netting process also results in a loss, see “ordinary income offset,” below.
Long Term Capital Loss Longer than 12 months Loss is deductible on a dollar-for-dollar basis against net long term capital gains. Any excess long term capital loss is deductible against net short term capital gain. If this netting process also results in a loss, see “ordinary income offset,” below.

"Ordinary income offset" – If the netting process results in an overall short- or long-term capital loss, such loss may be used to offset $3,000 of ordinary income. Any remaining loss is carried forward indefinitely.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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