2012 Practical Tax Planning: Capital Gains and Losses

November 29, 2012Comments Off on 2012 Practical Tax Planning: Capital Gains and Losses

Are you harvesting your tax losses? You should be. There’s not much that’s more disappointing than leaving tax losses on the table unnecessarily. With this article, we’ll help you harvest those losses.

Offset Capital Gains and Capital Losses. As an individual taxpayer, you have capital gain and loss strategies that you can use for your benefit. We’ll get to those in a moment. First, keep these rules in mind when planning your capital gains and losses:

  • Short-term capital gains and ordinary income are taxed at rates of up to 35 percent.
  • Long-term capital gains are taxed at rates of up to 15 percent (0 percent if you are taxed at a regular rate of 15 percent or less).
  • If personal capital losses exceed personal capital gains, you may deduct up to $3,000 in losses and carry forward those losses in excess of the $3,000.
  • Long-term gains and losses are offset before application against short-term gains and losses.

Strategy 1. Offset short-term gains subject to the 35 percent tax rate with long-term losses (15 percent tax rate). In other words, kill 35 percent taxes with 15 percent losses (e.g., sell stocks held more than one year that produce a loss to offset gains from stock held one year or less).
Strategy 2. Use long-term losses to create the $3,000 deduction allowed against ordinary income. Again, you are trying to use the 15 percent loss to kill a 35 percent tax (or a 0 percent loss to kill a 15 percent tax, if your tax bracket is lower).
Strategy 3. If you have lots of capital losses and the $3,000 allowance is looking extra tiny, sell assets to create offsetting gains.
Strategy 4. As an individual investor, avoid the wash sale rule. If you sell a stock or other security and purchase substantially identical stock or securities within 30 days before the date of sale or after the date of sale, you may not recognize any loss on that sale. 1 Therefore, if you want to keep the almost identical stock position but also recognize a loss, you need to roll the dice for more than 30 days.

Give Appreciated Stock to Charity. The stock market has done well recently, and you could easily have appreciated stock in your portfolio. If you are going to make a donation to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit. “Wow!” you may be saying. “Did you say more tax benefit?” Yes. It works like this:

  • You deduct the fair market value of the stock.
  • You don’t pay taxes on the appreciation.

Don’t Gift Stock with Losses. If you could sell a publicly traded stock at a loss, DO NOT give that stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that loss good-bye.

The solution: Sell the stock first to create the tax-deductible loss. Then give the cash realized to the charity.

About author:

Darrel serves as the Executive Director of Darrel Whitehead CPAs, an accounting practice performing tax, accounting, and administrative services. Beginning his career at Arthur Andersen, Darrel moved on to a regional CPA Firm, Singer Lewak in business management developing expertise in taxation and managing the business affairs of high profile clients in the music and entertainment industries.

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