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Timing capital gains and losses: Tax planning for 2012 & 2013

Beginning this year, many proposed and new tax laws will affect whether tax payers sell investments before the end of the year or keep them until 2013. Some of these laws concern current income tax rates, capital gains rates and dividends, and the new Medicare tax.  Unless Congress takes action, we could see some substantial tax liabilities beginning next year.

The current income tax rates of 10, 15, 25, 28, 33, and 35 will last through the end of 2012.  If Congress decides not to do anything then the rates will revert to the pre Bush-era rates of 15, 28, 36, 36, and 39.6.  There has been Congressional support for keeping the lower rates or for keeping the 10, 15, 25, and 28 rates while reinstating the 36 and 39.6 rates for high income taxpayers. 

Similarly the Bush-era capital gains rate of 15 is set to expire at the end of the year, reverting the tax rate to 20%.  Congress is debating whether to keep the lower rate for all taxpayers or to revert to the higher rate for the higher income taxpayers. ($200,000 single/$250,000 couple) 

Of course the 3.8% Medicare tax is still in the mix.  Under the current health care law, beginning in 2013, this tax will be imposed on the higher income taxpayers with the $200,000 single/$250,000 couple thresholds. This tax will be imposed on the lesser of net investment income or the excess over the AGI thresholds mentioned above.  Be aware that net investment income includes rents, royalties, gains from disposing of property used in a passive activity, and income from a trade or business that is a passive activity.  

Taxpayers in the higher thresholds who are on the fence about whether to sell investments may want to consider selling before the end of the year to take advantage of the lower rates and lack of Medicare tax in 2012.  However the decision to sell must make good sense.  If possible, taxpayers may want to consider shifting their investments to non-taxable income such as municipal bonds or distributions from a Roth IRA.  While you would have taxable income from converting a traditional IRA to a Roth, any distributions in future years would be tax free.  

If you are a high income taxpayer, it may be important, now more than ever, to consider contacting your CPA for a tax plan.  It is important to stay informed and mitigate unnecessary surprises with your tax liability.  Please contact us with any questions, or to talk about what these new laws might mean for you.

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