Responses to high stock prices and capital gains tax reduction

Article Abstract:

The lower long-term capital gains rate created by the Taxpayer Relief Act of 1997 impacts decisions on whether to sell low-basis appreciated stock. Stockholders may consider selling their stock to pay pre-existing debt if the circumstances of particular debts warrant immediate pay-offs. The lower rates may provide an incentive to purchase luxury items, particularly if the stocks apparently are overvalued. Giving gifts is more attractive because the need to wait for the stepped-up basis at death is less imperative.

Prices and rates, Securities, Securities prices

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Active management v. passive investing

Article Abstract:

The lowering of the long-term capital gains rate and the increase in the holding period to 18 months by the Taxpayer Relief Act of 1997 may change the balance between passive investing and active management. Meeting the after-tax returns of index funds would require outperformance of the index by approximately 1/2% a year. However, history has evidenced that most managers are not able to outperform the index and many long-term disciplined investments outperform simple indexed investments in the long term.

Portfolio management

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Capital gains changes

Article Abstract:

The many changes to the capital gains provisions made by the Taxpayer Relief Act of 1997 are important and will require planners to review estate plans. The mid-term and long-term reduction in rates to 28% and 20% justify the 1 year and 18 month holding periods in light of possible declines in market values. Deferred investment is not as attractive while leveraging debt is more attractive after the Act. Other areas to consider include stock options, compensation plans, and charitable giving.

Estate planning

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