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TAX CONSEQUENCES OF INVESTMENTS (not salaried income) in non-pension funds.

A capital gain is the profit that results from the sale of a capital asset (e.g., a stock or real estate) over its purchase price.

There are two types of capital gains (short term & long term), and both are subject to a capital gains tax.

An asset that is sold within one year of purchase is considered a short term capital gain, and the profit is taxed as ordinary income.

In contrast, an asset that is sold after one year of purchase is considered a long term capital gain, and the profit is taxed based on the individual’s tax bracket. Taxpayers in the 25% income tax bracket or higher are taxed at a maximum rate of 15%; taxpayers in the 15% income tax bracket or lower are taxed at 5% (and will be zero after 2008). A person would need to hold on to an asset at least one full year to take advantage of the lower long term capital gains tax rates. To read a clear and concise explanation of capital gain and loss treatment for individuals go to Appendix 703 in Bond Portfolio Management, Second Edition (2001) by Frank J. Fabozzi. http://books.google.com/books?id=5qj02oqoTFsC&pg=PA 703&lpg=PA703&dq=short+term+capital+gain+%2B+ordinary +income+%2B+39.6%25&source=web&ots=IpDOn4_SYN&sig =QDPOAX2cBCYknojW70lp67JZBKE&hl=en&sa=X&oi=book _result&resnum=6&ct=result#PPA503,M1

Appreciation, interest, and dividend are three terms used in accounting that impact the amount of capital gains tax due.

Appreciation is the increase in value of an asset, such as a stock, a bond, or real estate.

Capital gains taxes are not due unless the asset is sold at a profit, and then only the profit portion is taxed.

Money deposited in bank accounts (e.g., checking, savings, or other types of investment accounts) earn interest.

The amount of interest earned depends on the amount of money deposited, the agreed upon interest rate and compounding frequency (daily to yearly), and the length of time of the deposit.

Most interest income is taxable.

Dividends are direct cash payments made to the shareholders of a company’s stock, usually on a quarterly basis, but could be monthly, semi-annually or yearly. Dividend income is taxable.

If a company has a dividend reinvestment program, shareholders may choose to reinvest their dividends for an equal amount of stock. The stock would fall under the category of appreciation and would therefore be tax deferred. Shareholders would be wise to keep accurate records of their investments/ reinvestments so they pay the correct amount of tax due when the stock is sold