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Articles: Harvest time: reap the tax benefits

The traditional tax strategy for investors is to try to “harvest” capital losses at the end of the year. Main reason: The losses can offset capital gains you have already recognized. But this year is different from most. Due to pending tax changes, you may be more encouraged to harvest capital gains, instead of losses, in 2012.

Basic rules: At the end of the year, you must “net” your capital gains and losses for income tax purposes. If you have a net long-term capital gain, the maximum tax rate in 2012 is 15% (0% for certain low-income investors). But short-term gains are taxed at ordinary income rates currently reaching as high as 35%. If you have capital losses, you can use those losses to offset capital gain income, plus any excess can offset up to $3,000 of highly taxed ordinary income. If you still have an excess loss, it can be carried over to next year.

Note that you must also be mindful of the “wash sale” rule. Under this tax law provision, you cannot deduct a capital loss from a securities sale if you reacquire substantially identical securities within 30 days of the sale.

These basic rules have not changed this year. But several key tax changes are in the works for 2013.

The maximum tax rate for net long-term capital gain is scheduled to increase to 20% (10% for certain low-income investors).

Ordinary income tax brackets and rates are also set to be adjusted upward. For instance, the top tax rate for 2013 is scheduled to be 39.6%.

An additional 3.8% Medicare surtax may apply to the lesser of your net investment income for the year or the amount by which your modified adjusted gross income (MAGI) exceeds $250,000 ($200,000 for single filers). “Net investment income” includes capital gains as well as interest, dividends, royalties and rents.

When you combine these pending tax increases, the effective tax rate on short-term gains in 2013 could top out at 43.4% for high income investors!

Although these scheduled tax increases may be repealed or modified after the November election, savvy investors will want to take precautionary measures. Typically, you might try to harvest capital gains that will be taxed at a maximum 15% in 2012 (as opposed to 20% in 2013).

On the other hand, if you already have short-term capital gains this year, you might realize short-term losses. Remember that long-term losses will offset long-term gains first.

Above all, it is important to stay flexible enough to adjust your strategies if the situation changes again. Consult your financial advisors for the best methods of positioning yourself for the tax harvest at the end of the year.


This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.

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