Assuming congress fails to enact legislation that would further extend the 2001-2002 tax reductions, the 15% long-term capital gains rate will expire 12/31/2012. Of course, recent history suggests that no tax legislation will be forthcoming until late in the year at best. Let’s focus on what the scheduled increase in capital gains rates could mean to you…
|
Taxpayers with ordinary tax rate of: |
Current capital gains rate |
Scheduled rates beginning in 2013 |
|
25% or Higher (taxable income over $70,700 MFJ/$35,350 Single) |
15% |
20% (18% for 5+ yr holding period if bought after 12/31/00) |
|
10% or 15% (taxable income up to$70,700 MFJ/$35,350 Single) |
0% |
10% (8% for 5+ yr holding period if bought after 12/31/00). |
In addition to these rate increases, there is also a 3.8% Medicare surtax when a combination of unearned income and earned income exceed $250k MFJ and $200k Single. Combine this with the return of the reduction in itemized deductions and personal exemptions, and “wealthy” tax payers could see capital gains tax rise from 15 to 25%, a 66.66% increase!
In a raising tax rate environment, the optimal strategy is to accelerate income this year (meaning you should stop harvesting losses and instead harvest gains). If you are well under the $70,700 MFJ/ $35,350 Single taxable income limit, capital gains harvesting is a virtually risk-free opportunity.
For those above the 0% threshold, there is some risk; if current rates are extended you will have paid taxes earlier than necessary, but would provide a step up in tax basis. We find the potential upside appealing and are likely to recommend using this strategy.
For those who already have capital losses carrying forward, it likely would be preferable to skip harvesting gains and allow the losses to continue to carry forward until 2013 when they can be applied at higher rates.
In short, 2012 may be the best year to realize capital gain. If you feel this strategy may work best for you, please contact us to review your case in detail before year end.
