Traditionally, many investors look to harvest capital losses at the end of a year to offset capital gains, but 2012 may be an exception to this strategy. Unless Congress enacts new legislation, numerous tax increases will take place beginning in 2013.
The top two federal marginal tax rates are scheduled to increase from 33% and 35% to 36% and 39.6%, respectively. Additionally, the maximum long-term capital gains rate would increase from 15% to 20%. Further, some high-income investors may be subject to a 3.8% Medicare surcharge on unearned income due to a provision in the healthcare law. Short-term capital gains and other investment income could be subject to a combined tax rate of 43.4% in 2013.
One strategy for 2012 would be to accelerate income by realizing long-term capital gains. The income will be subject to a maximum federal capital gains tax rate of 15% in 2012. The same gain could be subject to a tax rate of 23.8% in 2013 if the Medicare surtax is included.
A simplified example illustrates the possible savings. Assume you sell a capital asset that you have held for five years and realize a gain of $50,000. The additional federal tax in 2012, as a result of the sale, is $7,500 (15% of the $50,000 gain). The same sale in 2013 could result in additional federal tax of $11,900 (20% capital gain and 3.8% Medicare surtax).
If you decide to realize some long-term gains in 2012 and new legislation is enacted to extend the lower tax rates, you may be able to realize other losses before year-end to offset the gains realized.
Every situation is unique, and we recommend discussing your personal needs with your advisors. If you would like to discuss what strategy is most appropriate for your situation, please contact Bergan Paulsen today.
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