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A Merger

Chris Farrell Aug 21, 2008

Question: I own about 400 shares of Anheuser Busch common stock. I have been accumulating the stock slowly since 1976 mostly through a DRIP program. So my tax basis is relatively low. A company, I think it is “In Bev” is offering to buy out Anheuser Busch stock holders for about $70 per share. I would like to avoid paying taxes on the gain by putting the proceeds from the sale into some vehicle where the principle and interest will be available for my 8-ear-old child in the future, say college or high school expenses. Do you have any suggestions? Thank you. Brian, Brooklyn, NY

Answer: Yes, it’s the Belgium multinational InBev that is buying Busch. You won the stock-owners lottery. . The price tag for your good fortune is that Uncle Sam will take part of your gain. Most of the tax bite should be long-term capital gains, which is currently at 15%. One time-honored method of limiting the tax take is to comb through your portfolio and see if there are any stocks or mutual fund you’d like to get rid of at a loss. You can use a capital loss to offset a capital gain. You may be able to avoid paying capital gains altogether. The long-term capital gains rate for investors in the 10% and 15% income tax bracket will drop to zero between 2008 and 2010. The same zero rate holds for dividends.

My tax reactions are just quick ideas. It is well worth your while to work with a professional accountant to delve into the details of your portfolio to see how to best handle the gain.

In terms of taking the gain and saving for your 8 year olds college education, I’d vote for putting at least some money into a 529 college savings plan. The contribution must be in cash, and it’s made with after-tax dollars. But the money compounds free of taxes. The gain is also tax free when the money is withdrawn to pay for qualified educational expenses. A 529 plan is treated favorably when it comes to the basic financial aid formula.

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