With 2013's revamped tax brackets creeping closer by the day, it's time for investors to milk today's cushy Bush Era tax cuts while they still can.
Come Jan. 1, you can kiss those 0 percent long-term gains tax rates goodbye. Instead, there will be a minimum 10 percent federal tax on long-term gains, with the cap raised from its current 15 percent to 20 percent.
Then there's the Medicare contribution tax to consider. High-earning taxpayers will see an extra 3.8 percent levied against net investment income, including long-term capital gains –– bringing the highest possible tax rate on gains to 23.8 percent.
“The 2012 federal income tax environment is still quite favorable, but we may not be able to say that for long," says Robin Christian, a senior tax analyst for Thomson Reuters. "Ta x planning actions taken between now and year-end may be more important than ever."
Here's how Christian recommends finishing out the year to your advantage:
Make big sales before Dec. 31. This makes sense if you've owned assets for longer than a year –– say, stocks, or a vacation home –– and stand to make a big gain by selling. "Ditto for the sale of a main home if the taxpayer expects the gain to substantially exceed the $250,000 home-sale exclusion amount ($500,000 for joint filers)," Christian says.
Sell promising stocks, then buy them back. This is a tricky maneuver but can play to your advantage if you time it right. "If a taxpayer owns appreciated stock outright –– not through a tax-deferred retirement account –– that the individual has owned for more than a year and wants to lock in the 0 percent to 15 percent tax rate on the gain, but thinks the stock still has plenty of room to grow, he or she should consider selling the stock and then repurchasing it," Christian suggests.
Factor in your personal financial timeline. Keep in mind that selling and buying back stocks to take advantage of lower tax rates today could wind up costing more down the line. "If capital gain rates go up and a taxpayer sells the repurchased stock down the road at a profit, the total tax on the 2012 sale and the future sale could be lower than if the individual had not sold in 2012 and had only made a single sale in the future," Christian says.
"It might not make sense to pay the tax now –– assuming the taxpayer is not eligible for the 0% tax rate –– if he or she does not expect to sell the stock in the next several years or plan to hold onto the stock to pass on to heirs."
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