Capital Gains Tax Planning for 2013

As you have probably heard, income taxes in 2013 are set to drastically change if no new laws are passed. One of the areas that will be most affected is long-term capital gains. Currently, long-term capital gains have favorable tax treatment at 15%. Even better, if you are in the two lowest tax brackets, the rate on long-term capital gains is 0%.

In 2013, the 15% rate is set to be replaced with a 20% rate (18% on property purchased after December 31, 2000 and held at least 5 years) and the 0% rate increases to 10% (8% if held at least 5 years). On top of these rate increases, a 3.8% Medicare surtax is added to net investment income when income exceeds $250,000 for married couples filing jointly or $200,000 for singles.

This has prompted many individuals to consider selling stock in 2012 to take advantage of the lower tax rates, but does that make sense? Here are a few considerations to review when you’re making investment decisions.

  1. Don’t let tax consequences overshadow your investment strategy. Were you planning to sell stock in 2013? If so, accelerating those sales to 2012 probably makes sense if you feel that the stock is at a good price right now. Don’t sell if you think the stock is undervalued, just to save some income tax.
  2. Review your cash needs. If you don’t plan on using the proceeds in the next 7 years, the returns are diminished because you’re paying tax now that you could have deferred several years. Cash that you paid in tax now could earn greater returns in an investment even after you’ve paid the higher tax later.
  3. Will you be in the 10% or 15% tax brackets? If your taxable income will be under $70,700, you’ll have a 0% rate on long-term capital gains. This is the optimal situation to accelerate capital gains and get the most benefit of paying no tax on the gains.
  4. Are you expecting to be in a similar tax bracket in the future? If you are retiring or returning to school, you may have a significant drop in income that would put you into a lower tax bracket which may make it advantageous to defer your stock sales.

Although it may seem like an obvious answer to pay tax at lower rates, there are several factors to consider and each situation is unique. Make sure to include your investment advisor and CPA when you’re considering when to sell stock to see if it makes sense for you.