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Tap unique tax break on company stock

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in Small Business Tax

Q: When my friend retired several years ago, she did not roll over her company stock into an IRA. (She had bought some of the stock and her employer gave her some.) If she sells the stock, will it be taxed as capital gain? F.G., King of Prussia, Pa.

A: Partially. Assuming your friend is holding the company stock in a qualified retirement plan, she's eligible for a unique tax break: If a retirement plan distribution is paid in company stock, the retiree is taxed at ordinary income rates only on the original cost of the stock. Any appreciation in the stock's value is untaxed. When she sells the stock, the difference between the sales price and the original cost is low-taxed capital gain. Note: The 2003 tax act lowered the maximum federal tax rate on long-term capital to 15 percent.

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