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The end of the year is the traditional time for securities
investors to "harvest" capital losses for federal income tax
purposes. But there's an added wrinkle in 2012: Due to pending tax law changes,
you might try to reap more capital gains than losses. Thus, the usual strategy
of harvesting losses could be turned upside down.
Here's a recap of the basic rules. The capital gains and
capital losses you realize during the year are "netted" under complex
rules when you file your tax return. A gain or loss is treated as being
long-term if you've held the securities for more than one year. For 2012, net
long-term capital gain is taxed at a maximum tax rate of 15% (0% for investors
in the regular 10% and 15% tax brackets).
If you're showing a net capital gain on paper as year-end
approaches, any capital losses you realize will reduce the amount of the
taxable gain or offset it completely. An excess loss can then offset up to
$3,000 of highly taxed ordinary income before any remainder is carried over to
next year. However, the usual strategy of harvesting losses is complicated this
year by three key tax law changes scheduled for 2013.
1. The maximum tax rate for net long-term capital gain will
increase to 20% (10% for investors in the lower tax brackets).
2. Ordinary tax rates are going up. For example, the top
rates of 33% and 35% will increase to 36% and 39.6%, respectively.
3. A special 3.8% Medicare surtax will apply to the lesser of net investment income for the year or the amount by which modified adjusted gross income (MAGI) exceeds $250,000 ($200,000 for single filers).
Barring any late legislation by Congress, investors may be
inclined to harvest capital gains instead of losses at year-end. As a result,
you can benefit from the favorable tax rates in effect for 2012. If you've
already realized short-term gains in 2012, you might want to realize short-term
losses to offset those gains. But don't use short-term losses to offset
long-term gains, if you can help it, because long-term gains are taxed at a
maximum rate of only 15% in 2012.
Other considerations may come into play. The best approach is to do what's best for your situation. Contact us for assistance in reviewing your options.
Last Updated by Noel Dalmacio on 2012-08-24 03:15:04 PM