Should you sell assets for long-term capital gains in 2012?

February 13, 2012

© 2012 by Michael C. Gray

The tax planning mantra is "defer, defer, defer". (Postpone recognizing taxable income as long as you can.)

2012 may be an exception.

Unless Congress takes action, the Bush tax cuts are scheduled to expire after 2012.

The maximum federal income tax long-term capital gains rate is scheduled to increase from 15% to 20%.

An additional 3.8% Medicare tax for investment income, including most taxable long-term capital gains, is also scheduled to become effective in 2013. The tax will apply for individuals with modified adjusted gross income exceeding $200,000 for singles, $250,000 for married persons filing joint returns, and $125,000 for married persons filing separate returns.

That means the maximum marginal federal tax for long term capital gain may increase from 15% to 23.8%!

Most commenters believe Congress will extend the tax cuts beyond 2012, but President Obama is seeking increased rates for individuals with adjusted gross income exceeding $250,000.

(I don’t expect Tax Reform to be resolved until after the 2012 presidential election, possibly not until 2013 or later!)

Some taxpayers may decide to take advantage of the current low rates by selling investments during 2012. Bear in mind that the toll will still be painful. California taxpayers could pay about 25% in combined taxes, or 25¢ for each $1 of additional long-term capital gain. Ouch!

An important point to keep in mind is the “wash sale” rules that apply to losses do not apply to gains. That means you can sell an investment to report a long-term capital gain and then immediately repurchase the same investment with no negative tax consequences. If you sell a security for a loss and repurchase the security during the period 30 days before to 30 days after the sale, the loss is disallowed and the tax basis of the replacement security is adjusted for the disallowed loss.

When you are considering selling investments to take advantage of the current low capital gains rates, it is probably a good idea to have a tax advisor make some estimated tax computations so you’ll know how much you’ll owe in April 2013 and whether to make estimated tax payments for 2012.

This information is oversimplified. Please don’t take actions with significant tax and financial results without consulting with your tax and financial advisors.

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