Gerber and Co., CPAs and Financial Advisors

Capital gains on investments held for one year or less are generally short-term capital gains, which can be taxed at ordinary income tax rates. For investments held over one year, the maximum long-term capital gains tax rate is 15 percent, or zero percent for certain individuals* in the 10 percent and 15 percent tax brackets during 2008-2010.

*Note: Under current law, qualified taxpayers in the 10 percent and 15 percent tax brackets pay zero percent long-term capital gains tax in 2008 to 2010. However, certain full-time students under age 24 do not qualify for the zero percent rate under revised Kiddie Tax rules. Taxpayers in higher tax brackets paid 15 percent on long-term capital gains.

To minimize your capital gains tax bill, you should review your portfolio before year end and consider the following strategies, depending on your situation:

Your capital gains exceed your losses for the year.

Consider selling stocks with losses to offset your capital gains. The best tax strategy may be to recognize losses that completely offset your capital gains and generate an additional $3,000 loss, since up to $3,000 of excess losses can be deducted against ordinary income. If you believe the stock with the loss has the potential to increase in value, you can deduct the loss and repurchase the shares as long as you avoid the wash sale rules. These rules state that you must repurchase the shares at least 31 days before or after you sell your original shares in order to recognize the loss for tax purposes.

Exercise caution with this strategy. If the price of the shares rises substantially before you repurchase them, your tax savings from the loss deduction may not be worth as much as the investment gains during that time period.

Your capital losses exceed your gains for the year.

Capital losses offset capital gains on a dollar-for-dollar basis, plus up to $3,000 of excess losses can be deducted against ordinary income. Any additional losses must be carried forward to future years. Thus, if you have excess capital losses, you may want to consider selling some stocks with capital gains to offset those losses. The best candidates would be stocks that you believe have neared their peak price.

If you want to continue to own the stock, you can sell it and then immediately repurchase additional shares. You'll generate a capital gain to offset your losses and you'll have a higher cost basis for your new shares. In this situation, you don't have to worry about the wash sale rules, since those rules only apply to stocks sold at a loss.

You are holding stocks with large capital gains.

If you are planning a large contribution to a charity, consider donating appreciated stock that you have held for over a year. You can deduct the fair market value of the stock as a charitable contribution, subject to limitations based on a percentage of your adjusted gross income. In addition, you avoid paying capital gains taxes on the gain.

For 2010 (and 2009), if you are planning an annual gift of $13,000 -- or $26,000 if split with your spouse -- to a child, consider gifting appreciated stock. While your child retains your basis in the stock, he or she may only pay zero percent capital gains tax when the stock is sold, if he or she is in the 10 or 15 percent tax brackets in 2008 to 2010 (see *Note above).