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Year-end tax strategy: Zero in on capital gains

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in Small Business Tax

If you’re in a federal income tax bracket of 25% or higher, the maximum tax rate for a long-term capital gain (i.e., profit from selling a capital asset held longer than one year) is only 15%. But investors in the lower 10% and 15% tax brackets—for example, your children—can do even better.

Have your low-bracket children realize capital gains this year. Reason: The federal income tax rate on long-term capital gains is reduced to 0% for 2008.

Example: If a recent college graduate in the 10% or 15% bracket is holding appreciated mutual fund shares, he or she can sell the shares without paying a penny of tax (assuming the grad is not affected by the kiddie-tax rules). If it is desirable to maintain the investment, the child can buy back shares at the current price.

Tip: The 0% rate is scheduled to extend through 2010.

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