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Qualified Small-Business Stock

A special tax break is designed to help qualifying small C corporations raise capital by allowing long-term noncorporate investors in original issue stock to cut the tax on their profit. The investor must hold the stock for at least five years to take advantage of this exclusion of gain on the sale. Moreover, the amount of the gain varies depending upon when the stock was acquired.

Date Stock Acquired Rate on Gain
NOT Excluded from Income
Percentage of Gain
Excluded from Gross Income
After 12/31/2014

28%

50%

After 9/27/2010 but before 1/1/2015 N/A 100%
After 2/17/2009 but before 9/28/2010 28% 75%
After 8/10/1993 but before 2/18/2009   50%

In order to qualify for this special break, taxpayers must jump through a large number of hoops. But the amount of tax saved--especially for higher-income taxpayer and those who face the new 3.8 Medicare tax on net investment income can be significant.

The capital gains exclusion applies only to gain on eligible stock (1) originally issued by a qualifying corporation after August 10, 1993, and (2) held for more than five years. The highlights of this break follow:

If a sale of stock qualifies for the exclusion, the remaining gain is not eligible for the regular long-term capital gains rate that applies to assets held for more than 12 months. Such gain is taxed at a maximum rate of 28 percent. However, if the exclusion does not apply because the stock is sold prior to the expiration of the required five-year holding period, the entire gain qualifies for taxation at the regular capital gains rate.

Tip

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.


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