Tax strategies for capital gains will be challenging for high-income earners even if the president doesn’t double the rate as he suggested. The top tax rate on long-term gains will go from 15% to 18.8% in 2013 due to the new Medicare Tax on tax payers with incomes over $200,000 ($250,000 for joint filers). The new tax was passed in 2010 to help cover the cost of health care reform. Keep in mind the current tax on long-term gains will go to 20% for everyone if the tax cuts put in place by the Tax Relief Act of 2010 are allowed to expire on December 31, 2012.
- Consider selling positions in 2012 to realize gains if you think you will be affected by the Medicare tax. You could immediately repurchase the position if you believe the investment merits holding. The wash sale rule only applies to taking a tax loss. You don’t need to wait 31 days before you buy the position back when you are taking a gain.
- Another strategy for 2013 is to use a donor advised fund (DAF) for taking gains and fulfilling your charitable goals. Any position that merits selling for investment reasons can be moved to the DAF before it is sold. The gain is not taxable and the proceeds can be used to meet future charitable commitments. DAFs can be used for rebalancing or to remove positions that have reached full value.
- The final strategy is to hold off taking losses until 2013. Losses may become much more valuable to offset other gains in future years. A typical tax strategy is to harvest tax losses at year end to minimize tax for the current year. The potential for rising tax rates in 2013 should make tax payers consider accelerating income into the current year rather than deferring.
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