Toward the end of the year we frequently hear financial advisors talk about "harvesting" capital losses (or gains). Investors who have realized gains (or losses) may want to off-set them before the end of the tax year. This year there are some additional considerations, especially for lower income and higher income taxpayers.
Lower income taxpayers (couples with taxable income below $69,000 and singles below $34,500) will pay no tax on long-term capital gains up to these amounts. Take note that this is not gross income, but net taxable income (line 43 on form 1040). For example; a married couple with two children earning $94,000 in wages (after 401K contributions) who have $20,000 in itemized deductions would only have about $59,000 in taxable income after personal exemptions (4 X $3,650 or $14,600). This couple could take about $10,000 in long-term capital gains and pay no income tax on the gain. A potential strategy could be to sell a winner with long term potential and buy it back, effectively increasing your cost basis in the position with no tax due (transaction costs need to be considered).
High income taxpayers (couples with taxable income over $250,000 and singles over $200,000) have to consider changes coming in 2013, and whether 2011 or 2012 would be the best time to realize gains. In 2013 the Medicare surtax of 3.8% on investment income kicks in, and preferential treatment of long-term capital gains expires. Although we do not know what the rates will be for long-term capital gains in 2013, it would be prudent to review your portfolio and plan ahead.
Fire up the combine and get harvesting? Maybe.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).
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