TAX STRUCTURE

Taxes may be progressive or regressive. A progressive tax levies a larger tax on higher income earners. Examples of progressive taxes are:

• Income taxes

• Estate taxes

Regressive taxes level the same tax rate on everyone, regardless of their income. As a result, a larger portion of the lower income earner's earnings will go toward the tax. Examples of regressive taxes are:

• Sales taxes

• Property taxes

• Gasoline taxes

• Excise taxes

INVESTMENT TAXATION

Investors must be aware of the impact that federal and state taxes will have on their investment results. A taxable event will occur in most cases when an investor:

• Sells a security at a profit.

• Sells a security at a loss.

• Receives interest or dividend income.

CALCULATING GAINS AND LOSSES

When investors sell their shares, in most cases they will have a capital gain or loss. In order to determine if there is a gain or loss, investors must first calculate their cost basis, or cost base. The cost base, in most cases, is equal to the price the investor paid for the shares, plus any commissions or fees paid in connection with the purchase. An investor's holding period begins the day after the purchase date and ends on the day of sale. Once an investor knows the cost base, calculating any gain or loss becomes easy. A capital gain is realized when the investor sells the shares at a price that is greater than the cost base.

EXAMPLE An investor who purchased a stock at $10 per share three years ago and

receives $14 per share when the shares are sold has a $4 capital gain. This is found by subtracting the cost base from the sales proceeds: $14 - $10 = $4. If the investor had 1,000 shares, the capital gain would be $4,000.

An investor's cost base is always returned to the investor tax free. A capital loss is realized when investors sell shares at a price that is less than their cost base. If the investor in the previous example were to have sold the shares at $8 instead of $14, the investor would have a $2 capital loss, or a total capital loss of $2,000 for the entire position. Again, this is found by subtracting the cost base from the sales proceeds: $8 - $10 = -$2.

Capital gains and losses are further classified as short- or long-term capital gains or losses. Any gain or loss on an investment held for less than one year is classified as a short-term gain or loss. A short-term capital gain will be taxed as ordinary income. Long-term capital gains on assets held for more than one year will be taxed at a maximum rate of 15 percent.

 
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