Start Planning Now for Harvesting Your Capital Gains

So you’re sitting on a bunch of unrealized gains in your investment portfolio, and wondering when might be the best time to monetize them.

We suppose you just might “punt” on the matter – waiting to see who wins the election, and what the subsequent lame duck Congress will do (assuming they don’t go on vacation again).

But remember this – Obamacare (already on the books) imposes on higher income folk a new 3.8% surtax on their investment income, starting in 2013.  Not to mention, of course, that if the “Bush tax cuts” are allowed to expire everybody will be hammered by higher tax rates on both investment income, as well as ordinary income.

Here’s how the 3.8% surtax works:  it’s applied to the lesser of (1) net investment income, or (2) the amount by which “modified adjusted gross income” (MAGI) exceeds a threshold, which would be $250,000 for joint filers in 2013.  Net investment income would include things like taxable interest, dividends, annuities and capital gains.

So you really have to push a pencil on this one, applying the rule to your individual situation, since the amount of your investment income isn’t the only variable.  Other decisions which you might make could independently influence the measurement of your MAGI – such as, f’rinstance, whether to take money out of your IRA or retirement plan, and how much.

And don’t lose sight of the impact of any available capital losses which you might also want to trigger.  Recall that realized losses are offset against realized gains, in the measurement of your taxable income in a given tax year.

But wait a minute, you say.  Aside from the tax implications of the timing of sales of some of those gems in your portfolio, you have high hopes for additional future appreciation and you just don’t want to sell, maybe.

Here again, sharpen up that pencil.  Realize a gain in 2012 to take advantage of the more favorable tax rates, and consider just buying back the same amount of shares which you sold – maybe even more of them.  If you sell at a loss, however, beware of the “wash sale” rule, which prohibits recognition of a loss if the very same, or substantially identical securities are bought within the 61 day period – 30 days before or 30 days after the date of sale.

It’s going to be an interesting Holiday Season, come this December.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

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