QNow that a version of President Bush’s tax cut is reality, and the tax on realized capital gains has been severely reduced, will we still be able to offset up to $3,000 of ordinary income with net realized and carry-forward capital losses?

T.G., Portsmouth, R.I.

A. Yes. There’s really no change when it comes to losses; the big changes involve gains.

Let’s take them one at a time (and look at the complications these changes will trigger, too):

LOSSES: In general, you still get to use all your losses to offset any gains you may have, said Mark M. Higgins in an interview at the University of Rhode Island’s College of Business Administration in Kingston, where he is a professor of accounting.

This will reduce the amount of gains that will be taxed, saving you money. What if you have any leftover losses? (Or what if you have no gains to offset?) You may still use up to $3,000 of such losses to reduce your ordinary income (wages and so on) for tax purposes, said Higgins, a CPA and co-author of “Concepts in Federal Taxation.”

If you still have losses left over, you can still carry them forward to future years.

For example, suppose you sell some mutual-fund shares and some stock this year and you have no other such transactions. Suppose, too, that your sale of mutual-fund shares results in a loss of $10,000; your sale of the stock results in a profit (a gain) of $6,000.

In this example, you’d use $6,000 of your loss to wipe out the $6,000 in gain. As a result, you’d owe no tax on the gain.

What about the remaining $4,000 in loss? You could use $3,000 of it to reduce your ordinary income this year for tax purposes, then carry over the remaining $1,000 to next year.

GAINS: This is where the real action is. Under the old law, the maximum federal income-tax rate on long-term capital gains (for assets held more than one year) was 20 percent.

But under the legislation that Congress approved and President Bush signed into law in May, that maximum rate is now 15 percent – a drop of 5 percentage points.

Say you reap a $1,000 net profit on the sale of some stock. Under the old law, you would have had to pay $200 in federal tax. Under the new law, you’ll pay $150. So you’ll save $50.

Look at it this way: for every $1 in profit you make, you’ll save 5 cents in taxes. Under the old law, you had to give that 5 cents to Uncle Sam. Under the new law, you can put it in your pocket.

Keep in mind that this reduction applies if your taxable income puts you in the 25 percent federal income-tax bracket or higher.

People in lower tax brackets – in other words, the majority of taxpayers, who are normally in the 10 percent or 15 percent bracket – will also save: The maximum rate on long-term capital gains for them is now 5 percent, down from a maximum of 10 percent – a drop of 5 percentage points. (And for one year only, 2008, the rate will drop to zero.)

Why the changes? A congressional conference-committee report accompanying the new law said, “The committee believes that reducing the capital-gains tax lowers the cost of capital and will lead to economic growth and the creation of jobs. Economic growth cannot occur without savings, investment, and the willingness of individuals to take risks. The greater the pool of savings, the greater will be the monies available for business investment. It is through such investment that the United States’ economy can increase output, productivity, and employment. …”

EFFECTIVE DATE: In general, the new long-term capital gains rates apply to assets sold after May 5, 2003. So they’re in effect right now. (In general, short-term gains continue to be treated as ordinary income. But remember that most regular tax rates have fallen, too, so you generally won’t pay as much tax as before on short-term gains.)

The U.S. Treasury estimates that the lower rates on capital gains (and on certain types of dividend income) will save taxpayers about $8 billion this year alone, reducing taxes for 26 million taxpayers.

In general, you’ll see the impact of the new lower rates when you file your tax return early next year, said Bob D. Scharin, a lawyer and editor of Practical Tax Strategies, a monthly journal for tax professionals published by RIA of New York.

Some taxpayers who make quarterly estimated-tax payments and who have significant capital gains can get at least some of the savings sooner, by reducing the amount of tax they pay quarterly, Scharin said.

WHAT’S AFFECTED: The favorable capital-gains rates reviewed here apply only to profit (or loss) from the sale of certain types of assets, such as stocks, mutual-fund shares, bonds, land held for investment and certain amounts you get from the sale of other investment property, such as a duplex, condominium, apartment building or summer house used as a rental property, Higgins said.

But other rules apply for certain other types of assets, such as collectibles; inventory and other items used in your trade or business; depreciable or real property used in your trade or business; and business supplies.

SELLLING YOUR HOUSE: The profit you get from the sale of your main house is covered under other rules, which the new law hasn’t changed. In general, there’s no tax on up to $250,000 in such profit if you’re single, $500,000 if you’re married (assuming you’ve lived in the house for two of the previous five years).

In general, any profit that doesn’t qualify under those rules will be taxed – but at the new, more favorable capital gains rates mentioned above.

COMPLEXITY: For some taxpayers, it’ll take a while before the benefits of all these changes sink in. But the benefits come at a price: It’s going to be a lot harder to account for your gains (and losses) when you fill out your tax return early next year.

For example, the effective date for lower capital gains rates “creates complexity and burden for taxpayers, and will likely result in a larger number of errors” on returns, according to the Treasury’s “complexity analysis” of the new tax law.

Normally, you must account for your gains and losses on a special form, known as Schedule D. Already fiendishly complicated, Schedule D will be even longer and more complex. On it, you’ll have to apply one set of rules for gains you realized before May 6, another for gains realized after May 5 and still another for certain types of dividends, Higgins said.

If your only gains are from mutual fund capital-gains distributions, you won’t be able to use the short worksheet you could before; you’ll instead have to use Schedule D. (Nearly 6 million taxpayers will have to shift to Schedule D from the short worksheet, the Treasury estimates.)

Henry W. Stad, of Rumford, R.I., local coordinator and tax counselor for the AARP Tax-Aide program, said these and other changes will prompt more taxpayers to seek professional help, costing them money.

Had enough? One more point: The new rules and rates for capital gains and dividends are scheduled to expire at the end of 2008, so enjoy them while you can.

TODAY’S TIP: Don’t forget that CCH Inc. of Riverwoods, Ill., a national publisher of tax and other information for accountants and other professionals, has a booklet that explains, in plain language, how the new tax law may affect you – including the new rules for gains, losses and dividend income.

“Highlights of the Jobs and Growth Tax Relief Reconciliation Act of 2003” costs $7 (plus about $3 shipping). Order by phone at (800) 248-3248, or online: www.cch.com.

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(Neil Downing is a Journal staff writer and author of ” The New IRAs and How to Make Them Work for You.” If you have questions about your money matters, call us at 1-401-277-7484 or 1-888-697-7656 and leave a message. (When calling toll-free, please ask for ext. 7484.) We can’t reply personally; as many questions and issues as possible will be addressed in this column.)

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