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Tax Planning Strategy: Capital Gains Harvesting

This post is currently being updated for corrections, watch for the re-post.

My prediction: Taxes are going up

President Barack Obama was reelected president and Democrats maintain control of the Senate.  Republicans still have majority in the House.  While this may mean that nothing as significant as the Affordable Care Act will pass again (at least within the next two years), it also means a complete repeal is unlikely.  All those tax increases start next year in 2013.  In addition, Californians just passed a new tax primarily aimed at the “wealthy”.  The President wants to tap the wealthy too!  Here’s a run down of what’s in store, just to name a few new taxes: 

         California Prop 30 increases CA taxes on earnings over $250,000 for single taxpayers ($500,000 joint filers) retroactively beginning January 1, 2012, and increases sales tax by 0.25% beginning 2013

         “Bush-era” tax cuts expire end of 2012 bringing tax rates up across the board, restoring the “Marriage Penalty”, and increasing tax rates on capital gains and dividends

         The “Affordable Care Act”  imposes a new Medicare tax on investment income and the “wealthy” commencing 2013

         Estate taxes increase and the gift exclusion decreases by over $4 million!

         Payroll tax holiday (we’ve been paying 2% less in social security taxes) expires after 2012 

If I had to guess at what the future holds, I think Congress will pass the President’s proposal which extends the Bush tax cuts for lower to middle income families but increases taxes on the upper income levels. 

Here is a table that may help show the federal increases visually:


2012 rates

Affordable Care Act increases

Expired cuts increased rates by

2013 rates

President’s Proposal

Individual tax rates (income ranges for MFJ as of 2012)


      $0 – $17,400





      $17,400 – $70,700




   $70,701 – $142,700





  $142,701 – $217,450





  $217,451 – $388,350





      $388,350 +







Capital gains


3.80% (1)






3.80% (1)




Medicare tax – high wage earners


0.90% (1)



Estate tax




Lifetime gift exclusion



 (1)   Individuals will pay an additional 0.9% Medicare Hospital Insurance (HI) tax on wages and self-employment income on amounts earned above certain threshold amounts: 1. $250,000 for joint returns; 2. $125,000 for married filing separate; and $200,000 for all others. To the extent that the amount of the income exceed the threshold, the tax on investment income is 3.8% of the lesser of:

1.      Net investment income, or

2.      The excess of modified adjusted gross income (MAGI) over a threshold amount. 

(2)   Income ranges differ from 2012 income ranges 

Here is a table that shows the CA Prop 30 increases (taxable income ranges): 

Prop 30 (effective January 1, 2012)

$250,001 -$300,000 for single/MFS

10.3% (1% increase)

$340,001 – $408,000 for HOH
$500,001 – $600,000 for MFJ
$300,001 -$500,000 for single/MFS

11.3% (2% increase)

$408,001 – $680,000 for HOH
$600,001 – $1,000,000 for MFJ
More than $500,000 for single/MFS

12.3% (3% increase)

More than $680,000 for HOH
More than $1,000,000 for MFJ



It’s Your Money Not Theirs

Clients, Friends and Fans,
Sunday night Don and Paul were guests on the radio show “It’s your money not theirs” hosted by our good friend and former partner, Richard Muscio.  The show airs every Sunday at 7 p.m. on 760 KFMB.

We talked about entity selection and borrowing from traditional lenders like banks.

We have added some of the material to our website under articles of interest you can download the pdf here “Choice of Entity


Listen to


This is Your Blog Too!!

I can’t believe this blog will celebrate its two year anniversary in April.  I think we should have a party!  Oh wait, we already do… it’s our “end of tax season” party.  We’ve had our ups and downs but I’m proud of us for sticking with it.  Our staff stays very busy and sometimes posting a blog is challenging.  Things got pretty quiet during my four months of maternity leave last year, but I’m back!  I know you are excited! 

We created this blog to help you; our readers, our clients, our friends.  We know you are bombarded with information.  Tax and accounting can sometimes be intimidating topics.  Our goal is to keep you informed so you can be better business owners, employees and asset managers.  You can help us by giving us your feedback and requests.  If you have a question related to a particular blog already posted, leave a comment.  You can always email us questions on requested topics.  There are no dumb questions.  I’d bet money that if you have a question, many others have the same one.

One of my personal goals this year is to ramp up the blog again.  I want it to be resource for our readers. 

So bring on the questions!

The Dry Cleaner

One morning I stopped by my dry cleaners to drop off some clothes. There was a sign on the door thanking the loyal customers of so many years, and due to an equipment breakdown, same day service was no longer available.  Also, the prices were increased by about 40%. The reason I have been using this cleaner for the past 20 years is that he offered same day service.  The convenience of only having to remember “CLEANERS” one day a week made this dry cleaner very appealing to me.  He was also the cheapest cleaner in town.

One day I asked the owner what happened.  He told me that his equipment was very old and he had never been able to save enough money to replace it.  Now, with credit markets as tight as they are, he cannot get financing to purchase new equipment. 

There are valuable lessons here for business owners: 

It is critical that you know your competitive advantages and disadvantages, in the customers’ eyes.  This business owner thought that he had to have the lowest price to compete.  So he priced his service about 16% to 30% below the competition. He was the only cleaner that offered same day service without an extra “same day” charge.  Now, he no longer has either the price advantage or the service advantage; he is just like his competitors. 

I wonder how much business he would have lost if he raised his prices to a point midway between the competition’s regular price and their “same day” price?  Certainly, he would have lost the “bottom feeders”, but by observation, most of his business was “going out” or office work clothes and uniforms…..clothes people need every day for work.  I’ll bet he wouldn’t have lost much business at all.  You are talking about 50 to 75 cents per garment. 

Here are some lessons in this unfortunate story:

  1. Know your costs…..including the wasting cost of the assets used in your business.  Nothing lasts forever.  Manufacturers have data they are more than willing to share.  Also consider the obsolescence risk.  Due to the high cost of labor, most manufacturers are automating equipment to greater degrees to limit labor inputs.  Many business owners think of depreciation as something you do for taxes.  In reality, it is “a rational method of allocating the cost of an asset to the periods it is used in the business.”
  2. Know your customers.  Ask them why they like to do business with you.  They will tell you.  If my cleaner friend had asked me I would have told him that it was worth a premium to be able to pick up my cleaning the same day I dropped it off.  If most customers were like me, he could have earned more over the life of his business and been in a position to replace the equipment.  When he is ready to retire, he would have had a saleable business.  I’m not sure he has that anymore.  He’s just another dry cleaner now.
  3. Find differentiators other than price.  Someone else can always do what you do cheaper.  Find a unique value proposition you can offer your customers and set your price based on that value proposition.  Regularly review your cost of providing the goods or services you sell and make sure you protect your margins. Frequently we help our clients in this regard by illustrating “cost, volume profit analysis” at various price points with various volume assumptions.  It is much easier for a small business to achieve and retain profitability at low volume and high margins than attempting to ramp up volume and hold down prices.
  4. Always keep an eye on technology as applied to your business.  Don’t be afraid to adopt new technology if your due diligence indicates that it will improve your value proposition. 

Michael Gerber, author of the “E Myth” and several other best selling business books, has built an empire based on a simple concept:  An owner must work “on” his business, not “in” his business.  

We must all work smarter, not harder.  Working hard at the wrong thing frequently leads to exhaustion, burnout and failure.

Welcome Jim Jamieson!

Over the years we have developed a friendly and collaborative relationship with Jim Jamieson, CPA, whose practice “The Jamieson Company” was located in Oceanside.  Effective September 1, Jim merged his practice with ours.  Welcome Jim and Jamieson Company Clients!  We are looking forward to working with Jim and serving Jamieson Company Clients!

Deductible Auto Mileage Expense Increase

The IRS has issued the new mileage rates.  Beginning July 1, 2011, the standard mileage rate for business purpose is 55.5 cents per mile (was 51 cents from January 1 through June 30).  The most common uses of the rate include:

  • Mileage reimbursement to employees using an accountable reimbursement plan (can be less than the federal rates, but never greater)
  • Mileage deducted on schedule C
  • Unreimbursed business miles deducted on Schedule A 

The IRS publishes these rates as a guideline, not a requirement.  Businesses are allowed to use a lower rate if they choose.  However, you cannot use a higher rate.  If a business reimburses its employees using a higher rate, the difference would be taxable to the employee. 

The mileage rates for medical or moving expenses also increased 4.5 cents from 19 cents to 23.5 cents per mile.  The charitable mileage rate remains at 14 cents per mile.

Potentially Sizeable Tax Credit for Electric Vehicle Owners!

The IRS enacted a nonrefundable income tax credit for “new qualified plug-in electric drive motor vehicles”. For each qualifying vehicle, the credit is $2,500…. plus $417 for vehicles with at least five kilowatt hours (kwh) of rechargeable battery power, and an additional $417 for each additional kwh above five, to an additional credit of $5,000. This brings the maximum credit to $7,500. 

This is great news considering the 2011 Chevy Volt is advertised as having a battery capacity of 16 kwh, the 2011 Nissan Leaf 24 kwh, and the Ford Focus Electric 23 kwh. For example, Volt owners would be eligible to receive a whopping $7,500 tax credit ($2,500 plus $417 (for kwh of at least 5), plus $4,587 (for the extra 11 kwh (16-5)). 

Electric model requirements for the credit are that the qualified plug-in vehicles must be powered ‘to a significant extent’ by an electric motor drawing power from a battery with a capacity of at least 4 kwh that can be recharged from an external source of electricity. Cars with the ability to use both a plug-in electric engine and gasoline engine, technically known as plug-in hybrid electric vehicles (PHEVs) are eligible. 

Vehicles with fewer than 4 kwh or weighing more than 14,000 pounds are not eligible. 

The credit will have a production phase-out similar to the previous hybrid vehicle credit. The phase-out per manufacturer begins once the total qualifying vehicles manufactured and sold for use in the U.S. since the beginning of 2010 reaches 200,000 units. From there, the applicable credit per vehicle will be cut in half for two calendar quarters, then reduced by 25% in the third and fourth quarters and fully eliminated after that. The phaseout is more generous than the Hybrid credit which started to phase-out at 60,000 vehicles per manufacturer produced and sold after Dec. 31, 2005. 

To claim the credit Form 8834, “Qualified Plug-In Electric and Electric Vehicle Credit” will be filed with the taxpayer’s returns.

IRS Requesting Small Business Databases (i.e. QuickBooks & Peachtree)

Do you own a small business using QuickBooks or Peachtree as your accounting software?  Most likely you have stored critical unrelated financial information within the framework of the software.  By unrelated financial information we are referring to customer/client lists, personnel data, confidential client information, and other information used for business purposes.

Jump forward a few months from now and imagine receiving a letter from the IRS giving your business an examination notice (meaning you’re under audit).  How concerned would you be, or your clients for that matter, if the IRS requested your software database containing all this unrelated financial data?  Unfortunately this request is occurring more frequently and is being explained as the IRS’ attempt to modernize.  The IRS has purchased copies of various small-business accounting software to accomplish this task.  Requesting the electronic files is now standard operating procedure.

In recent years the IRS has ramped up efforts to more aggressively collect taxes from small businesses.  Statistics show that small businesses are one of the largest contributors to the “tax gap” (taxes owed but not paid or reported).  What better way to close the gap than to increase audits on small businesses where non-compliance is an issue?  Let’s face it…large corporations have their own accounting armada to keep everything straight with laws, regulations, and the taxes they pay.  Small businesses don’t have that luxury.

The main concern we have in providing IRS access to an accounting database is whether the auditor will stay within the scope of the requested information.  Do you want to IRS potentially contacting one of your clients?  Seeing what they purchase from you? Seeing what you purchase from vendors?  The fact that you are being audited is not something to brag about, but client relationships could be affected if some of their private information is handed over.  How would you feel if your personal information was handed over to IRS?  What would you do if you found out?  Another concern would be your reputation if  word got out that your business was under audit.  Questions could arise regarding the circumstances of the audit (randomly selected as opposed to improper filing). 

If a company turns over complete electronic records, there is no way of knowing what the IRS will do with that information.  The IRS has not addressed this issue except to say “privacy of return information” is of utmost importance to the agency.  Virtually all professional organizations in our industry are vehemently opposing this policy.

In subsequent posts we will discuss ways to approach this dilemma if you are audited and IRS requests your data base.

Investment Strategy

Jeff Vistica, one of our business associates from Gradney & Vistica Financial Management offers this post with a comparison of my golf game to some other people’s investment behavior.   Enjoy!

By the way, if you are interested in contributing to our blog, email Mary for more information.

What’s your take on golf?

Jeff Vistica,

You may be for or against the sport or maybe you’re not going to adopt a stance either way. Regardless, I hope you’ll chuckle at a comment by Santa Clara University Professor of Finance Meir Statman, in which he opined, “Golf seems stupid to me — a cognitive error that misleads avid players into spoiling a good walk.”

Is the man crazy; clearly doesn’t get it? Or are you nodding your head in sympathy? Don’t worry, I’m not suggesting there’s a right or wrong answer. In fact, his challenge to golf enthusiasts along with his editorial title — “What Investors Really Want” — got me thinking about the value of differing perspectives.

When you take your leisure time, what is it that you enjoy the most? The competitive nature of sport…achievement…or perhaps a restorative pastime? What you choose doesn’t matter much to me. What does matter is whether you know deep down which is the right answer — for you. Wherever you find your reward should be the driving force for how you choose to play.

Translate that into the world of investing: like most years, 2010 offered up the usual frenzy of financial distractions that threatened to ‘hook and slice’ us into unforeseen sand traps. For example, consider this sampling of 2010 headlines:

  • May 29: “May 6 brought the ‘Flash Crash,’ a bewildering nearly 1,000-point slide that still defies explanation.” — The Wall Street Journal
  • July 23: “The equity markets are not working on a scale that is truly shocking.” — Financial Times
  • September 27: “Some 279 banks have collapsed since September 25, 2008.” — The Wall Street Journal
  • December 3: “The unemployment rate unexpectedly rose to 9.8 percent last month.” — The Wall Street Journal
  • December 29: “Housing market is still facing a blizzard.” — The Wall Street Journal

How did we respond to these and other reports? All too many investors reacted by swinging wildly at the risks and rewards from the previous hole, so to speak. Investors pulling their money in and out of the stock market documented this behavior. According to Morningstar, average stock mutual fund flows over the 36 months through November 2010 saw outflows of $414 billion, with $132 billion of these outflows occurring between November 2009 to November 2010.

Is this a wise strategy? Stocks in the S&P 500 Index ended the year up just over 15 percent. The Russell 2000 (U.S. small-cap) Index returned nearly 27 percent. International stock returns varied widely by country, with Peru and Thailand in the lead, and Greece and Spain in the basement. As a whole however, international stocks as measured by the MSCI EAFE Index, provided positive returns of just under 8 percent.

Investors who knew their game were best positioned to capture these sorts of returns in accordance with their personal risk/reward goals.  Those with a clearly established diversification plan realize a sound portfolio is built to ignore these distractions. They recognized that predicting market movements based on current events is nearly impossible and that a properly diversified portfolio is the winning strategy.


It's Your Money, Not Theirs

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