It's the little tax break that time forgot.

Well, maybe not so little. But how else to explain readers' reaction to some recent MoneyLine columns that mentioned the impending cut in the Rhode Island capital gains tax rate?

Every time I take note of the rate reduction, it seems, some readers express confusion, or even disbelief. The last time I mentioned it was on Oct. 10, and here's what a man from North Smithfield had to say in response:

Q: I read an article the other day on factors [to consider regarding the Rhode Island tax on gain from] condo sales. . . . I want to make sure that I understand the column right. . . . If you sell a house . . . is the tax on that $5,000 per $100,000, and after the first of the year, it's $1,670 per $100,000? Does that sound right? I'd love to find out a little more about it to be clear in my mind.

-- A.D., North Smithfield

A: You're on target.

You're talking about the profit (sometimes called "gain") from the sale of an asset that you've held for investment, such as real estate, stock or shares in a mutual fund.

What's the Rhode Island tax treatment? It looks like this:

If you sell now, you'll pay Rhode Island capital-gains tax at a rate of 5 percent. (This assumes that, at the time of sale, you've held the asset for more than one year.)

If you sell in 2007, you'll pay Rhode Island capital-gains tax at a rate of 1.67 percent. (This assumes you've held the asset for more than five years.)

If you sell in 2008 or later, you'll pay no Rhode Island income tax. (This assumes you've held the asset for more than five years.)

Why is there so much confusion over this? I think I know why.

The General Assembly approved the rate cuts in 2001. But under the law, which took effect in July 2001, the cuts didn't take effect immediately; they went into a kind of time capsule.

Well, here we are, and the capsule's about to open:

The first provision allows for a Rhode Island capital-gains rate of 1.67 percent. It'll take effect in just over two months -- January 2007.

The second provision allows for a Rhode Island capital-gains rate of 0 percent. It'll take hold in January 2008.

So let's say you plan to sell some long-held stock at a $1,000 profit. If you sell now, you'll owe the state $50 in tax. If you sell next year instead, you'll owe the state about $16.70 in tax. If you sell in 2008 instead, you'll owe the state nothing.

The bigger the gain, the more the savings.

So should you wait? Not necessarily, said Patricia A. Thompson, former president of the Rhode Island Society of Certified Public Accountants.

Remember the old saying: don't let the tax tail wave the investment dog. That means there are other factors to consider, not just taxes.

Suppose you've long owned a summer home in Narragansett. You plan to sell at a $100,000 profit. If you sell now, you'll owe the state $5,000 in tax. If you sell next year instead, you'll owe the state about $1,670. If you sell in 2008 instead, you'll owe the state nothing.

As this example shows, you'll save money by waiting. But is it prudent to wait? One factor to consider is whether you be sure you'll get the same price in the future that you can get now.

"To me, you always have to be careful of losing your deal the longer you wait," said Thompson, tax partner at Piccerelli Gilstein & Co. LLP, a CPA firm in Providence.

Look at the example above, involving the summer home in Narragansett. Let's say you've got a buyer who's ready to close.

Based on the price on the table, and other factors, you know you'll have a gain of $100,000 if you sell now. If you wait until next year, or even 2008, you'll be eligible for a lower tax rate, but will you get the same price that's being offered now?

There are other things to think about, too. For instance, if liberals regain control of Congress, will federal capital gains rates rise? (After all, there are federal tax consequences to weigh.)

There's the time value of money to consider, too. If you sell now, you'll have money in your pocket -- money available to invest, for example. If you wait, there's an opportunity cost -- maybe an opportunity lost.

All these things -- and more -- are worth thinking about, in consultation with your tax and investment advisers.

A few other points on this subject:

Some MoneyLine readers, who simply don't believe that lower rates are on the horizon, have asked me to cite the specific provision in the law. It's Rhode Island General Law 44-30-2.7, "Capital gains rate for assets held more than five years." Here's the key section:

"For tax years beginning in 2007, the capital gains rate for assets held more than five (5) years shall be eight and one-third percent (8.33%) of the federal capital gains rate(s) which were in effect prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Beginning in tax year 2008 and thereafter, the capital gains rate for assets held more than five (5) years shall be zero percent (0%)."

The legal language raises a question: What was the maximum federal capital gains rate in effect before EGTRRA? It was 20 percent. And 8.33 percent of 20 percent works out to 1.67 percent. That's the Rhode Island capital gains rate for next year.

If you have Internet access, you may find the law here:

www.rilin.state.ri.us

(On the left side of the screen, click on "Site map," then on, "Rhode Island General Laws." You'll be looking for Title 44, "Taxation," then for Chapter 44-30, "Personal Income Tax.")

Holding Period: In general, you'll qualify for the 1.67-percent rate next year, and the 0-percent rate in 2008 and later years, only if you've held the asset for more than five years. If you've held the asset for more than one year, but less than five years, the old rules apply.

Principal Residence: If you're planning to sell your principal residence, you probably won't have to worry about paying a tax. That's because Rhode Island follows federal law in this regard.

In general, you'll pay no Rhode Island tax on up to $250,000 of the gain if you're single, or up to $500,000 of the gain if you're married and filing a joint return.

(This assumes that you've met all requirements. For example, you must have owned the property -- and used it as your principal residence -- for at least two out of the five years leading up to the sale.)

If you're selling real estate and wonder about the impact of the lower rates ahead, be sure to read the Oct. 10 MoneyLine.

Don't forget that Rhode Island's new flat tax system is now in effect. In general, you calculate your Rhode Island tax under the regular system, or by using a single, flat rate. The flat rate is 8 percent for this year, lower in future years (7.5 percent for 2007, for example). But if you use the flat tax system, your capital gains will be taxed at the flat rate, not at the more favorable rates described above, said Thompson, who teaches taxation at Bryant University.

TODAY'S TIP: You'll be able to set aside up to $15,500 in a 401(k) or other such retirement-savings plan at work next year, up from $15,000 this year. If you're 50 and older, you'll be able to kick in an extra $5,000, for a combined total of $20,500 next year.

These are among the inflation-related adjustments that the Internal Revenue Service posted last week for retirement-savings and pension plans. You can find out more at this IRS Web site:

www.irs.gov/newsroom

(Click on this link: "IRS Announces Pension Plan Limitations for 2007.")

Also, if you can't wait for the 2007 version of the "Medicare & You" handbook, it's available now for download:

www.medicare.gov

(Click on the link "Medicare & You 2007.")

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

Sorry, no personal replies; as many questions and issues as possible will appear here.