Harvesting Capital Gains and Losses

By: William J. Killory, CPA (Sep, 2011)

With the end of the year fast approaching one aspect of tax planning is looking at your investment portfolio to harvest gains or losses. With the Dow Jones Industrial Average currently bumping around 11,000 it is significantly down from the all-time high of over 14,000 in 2007 and considerably up from the lows that hovered around 7,000 in early 2009. There has been a lull in recent tax proposals after a record number of enacted tax laws in 2010. President Obama's recent proposals will be debated and kicked around but with a rather contrarian Congress I would not expect a lot to happen on that front before the November 2012 elections.

With that in mind what can you do with your investment portfolio between now and next November. With the rather exciting swings in the stock market over the past few years there may be opportunity to take some gains, absorb losses and rebalance your portfolio. There are a variety of rules that govern the tax impact of investment gains and losses. Short term gains (investments held less than one year) are taxed at ordinary rates. These can be offset, first by short term losses and then by any excess long term losses over long term gains. If you have a net capital loss you can offset other ordinary income by $3,000 of that loss per year. If you have capital losses beyond the $3,000 amount that will carry into future years to offset capital gains you may recognize in the years ahead.

You should be careful when you are selling your securities at a loss. The wash sale rule prevents you from repurchasing the loss investment for a period of 30 days. If you sold General Electric stock for a loss and then turned around and repurchased General Electric within the next 30 days, that loss will not be recognized.

Long term gains (investments held for more than a year) can be subject to a variety of rates depending on the nature of the underlying investment. The current maximum rate on security gains (stocks and bonds) is 15%. If you have a gain on rental real estate then the rate on the depreciation recapture is 25%. Any gain on real estate above the original purchase price will be taxed at a maximum rate of 15%. Investments in precious metals have been a very popular and lucrative investment lately. These are considered collectibles similar to artworks and stamps and are subject to a maximum tax of 28%.

These rates will be in effect for 2012 barring some unforeseen Congressional action. The rates are scheduled to change in 2013 where the maximum rate on long term investment gains will go from 15% to 20%. There is also an additional tax that is scheduled to be levied starting in 2013 coming out of the "Obama Care" legislation from 2010. For married couples with income over $250,000 there is a 3.8% tax on "unearned income". Unearned income includes income from interest, dividends, rental activities and of course capital gains. Medicare beneficiaries should be wary as well as the premium paid for Medicare is affected by total taxable income which would include capital gains.

Talk to your financial advisors about your portfolio and whether it makes sense to rebalance your investments and take advantage of lower capital gain rates and absorbing some capital losses. Tax consequences should not be your primary reason for owning a security but with the changes in the market and the looming tax landscape over the next few years this is a conversation well worth having.

As always please contact your Dermody, Burke & Brown tax advisor if you have any questions regarding your taxable situation.


The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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