The bad news is that some higher-income taxpayers may be forced to pay taxes up front to take advantage of the lower rates in the future. Tax planners say people in the higher tax brackets need to think about the changes now because planning requires looking ahead five years down the road. For assets held more than one year, taxpayers who pay in the 15 percent bracket now pay ten percent capital gains taxes. For those in all higher income tax brackets, the capital gains rate for these long-term investments is 20 percent.
Different rates apply to certain specific investments, such as collectibles.
The 1997 Taxpayer Relief Act provided lower rates beginning this year. But the lower rates apply only to assets held for five years or more. The old, higher rates still apply to assets held for at least one year, but less than five years. Also beginning this year, higher-income taxpayers can make a special decision for assets they already own, called a deemed sale and purchase election. This allows the asset to be treated as if it were bought and sold in a single day, assuring that it qualifies for the new 18 percent capital gains rate in five years, avoiding sales and purchase commissions.