Blog facts correction: Capital Gains Harvesting

The tax harvesting blog had an error that we’d like to correct.  The concept is still important to consider.  However we were comparing short term capital gain tax rates to long term capital gain tax rates.  

Long term capital gains tax rate is currently maxed at 15%.  It will go back to 20% in 2013 and is subject to the 3.8% investment surtax for higher income individuals (for a total of 23.8%).  

Short term capital gains are taxed at your ordinary income rate which is current maxed at 35%.  It will jump up to 39.6% if Congress doesn’t act.  When you ad the 3.8% investment surtax for higher income individuals, the total is 43.4%. 

Historically capital gains harvesting has been a strategy to use up large capital losses.  This year, it’s a strategy to pay federal capital gains tax at a lower rate (15%) rather than pay tax at the projected rate of 23.8%. If you sell the asset, thus harvesting the capital gain, you can turn around and purchase the asset again.  Now you have a higher basis so that when you sell it in the future, you are paying less tax. 

Here is the simplified example: 

Stock X purchased 1/1/2005  $      5,000 Stock X purchased 1/1/2008  $          5,000
Value on 11/30/12  $    75,000    
Projected value on 12/31/14  $  105,000 Projected value on 12/31/14  $     105,000
       
If sold on 11/30/12 and then repurchased:    
2012 capital gain  $    70,000    
Tax on capital gain  $    10,500    
New Stock X basis  $    75,000    
       
Then sold again on 12/31/14   Sold  on 12/31/14  
2014 capital gain  $    30,000 2014 capital gain  $     100,000
Projected tax on gain  $      7,140 Projected tax on gain  $       23,800
       
Total tax paid on investment  $    17,640 Total tax paid on investment  $       23,800
Total gain after taxes  $    82,360 Total gain after taxes  $       71,200

 Tax saved from harvesting capital gains is $11,160. 

This strategy is easily executed with publicly traded stock.  It’s a bit trickier with other assets.  However, if you have been trying to sell a capital asset with a large gain, it might be worth sitting down with your accountant to find out if the tax savings justify lowering the price to affect a sale in 2012. 

We used an extremely simplified example to help illustrate the concept.  However, investments are usually much more complicated.  As always, see your tax advisor for help in applying tax planning strategies to your tax plan. 

We apologize for the error.

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