PricewaterhouseCoopers 2008 Guide to Tax and Financial Planning

Chapter 2. Investments and Stock Options

Although the stock markets have provided handsome returns over the past five years, they have been very volatile over shorter‐term periods. There have been many opportunities to capture extraordinary gains and suffer substantial losses.

During this time, investors have been rewarded with reduced regular income tax rates for interest and short‐term capital gains, and even lower tax rates for long‐term capital gains and qualified dividends. These lower tax rates should attract the attention of all investors, whether they invest in stocks, bonds, sophisticated hedge funds, or simple certificates of deposit. However, the lower tax rates are not permanent. The reduced regular income tax rates are scheduled to apply only through 2010, and the reduced tax rate on long‐term capital gains and qualified dividends are now set to apply through 2010 as well. It is imperative for investors to continuously monitor their portfolios in light of the ever‐changing tax environment to maximize their after‐tax investment rate of return.

Under current tax law, individual income tax brackets are adjusted for inflation annually. As these adjustments occur, investor tax liability is reduced on income subject to ordinary income tax rates, such as interest and short‐term capital gains. Long‐term capital gains and qualified dividends are taxed at more favorable tax rates, currently only 15 percent for most taxpayers. For those in the two lowest tax brackets—such as many ...