In some cases—flying trapeze acts come to mind—timing is everything. In others, it’s a bad idea. Just ask the managers of mutual funds under investigation by the New York attorney general for alleged late trading.
In tax law, there are plenty of instances when timing is important. Here are a few examples:
Long Term Capital Gains. Generally, to qualify for favorable capital gains rates of 15% (5% for those in the 10% or 15% tax brackets) for sales on or after May 6, 2003, assets must be owned for a year or more. For stocks that you purchase, start counting the holding period on the day after the trade date. When you sell, include the trade date of the sale as the end of the holding period.
Caution: Some assets do not qualify as capital assets, while others that are considered capital assets do not qualify for reduced rates. In addition, inherited capital assets may fall under different rules. Always consult an advisor regarding your personal situation.
Wash Sale Rules. When you sell stock at a loss, then reinvest in the same or a similar stock within thirty days before or after the sale, the loss is not deductible. You may think only investment traders have to worry about wash sale rules, but you could be affected if you are enrolled in dividend reinvestment plans. The rules do not mean you lose the benefit of the loss, as it is used to adjust your basis in the replacement stock.
Dividends. One of the widely reported benefits of the Jobs and Growth Tax Relief Reconciliation Act of 2003 was the reduced tax rate on stock dividends. The 15% rate (5% for those in the 10% or 15% tax brackets) generally applies to dividends received during all of 2003. Not all dividends qualify, however. For example, the dates you’ve owned a stock can make a difference. Dividends are typically subject to regular rates if your ownership falls outside a certain period of time surrounding the ex-dividend date.
Other situations when timing can work for—or against—you include like-kind exchanges, retirement plan establishment and funding, and Subchapter S elections.
It may seem that achieving a favorable outcome within the bounds of the tax law can be almost as difficult as a flying trapeze act. But, just like those skilled performers, a good sense of timing can result in success.