As the year draws to a close, it’s normal that our attention would be turned to income tax management. 

What’s not normal is that this year, if the laws play-out as they’re legislated, we’ll be turning the tax world upside down. 

Normally, we’d be looking to take tax losses and postpone gains, however, this year we’d be looking to do just the opposite, we’d be looking to take gains and shove those losses out a bit. That’s because the capital gains rate is expected to go up in 2013 as are the overall tax rates, that means your losses (if you have them) would be more valuable to you under next years tax rates than they would under this years rates.

Sounds easy enough right? Oh, if it were only that easy......

There’s actually a continuum of options: 

  • lower bracket tax payers who enjoy a zero percent capital gains rate this year want all the gains they can get. Next year they’re rate increases on capital gains exponentially
  • middle bracket tax payers, those in the 28% bracket want to take their gains too with this caveat, the best candidates for tax planning this year are middle bracket taxpayers who have little to no carryover losses from previous years. That’s because you MUST take your losses if you have them (which you’d be taking at a lower tax rate and you don’t want to do that) against your gains
  • high bracket tax payers likely too want to take their gains because their capital gains tax rates are lower this year than they’ll be next year but again, that makes sense only if they don’t have carryover losses from previous years for the same reason as noted above for middle bracket taxpayers

Bottom line is that you need to have the details of your personal situation on hand in advance to aid in your decision making, here’s what we recommend; 

  1. Know you gain and loss positions by early December and evaulate what can “go” and what can “stay” 
  2. Contact your accountant or tax preparer and ask them what amount of carryover losses you had when your return was completed last year
  3. Ask your accountant or tax preparer what your marginal tax bracket was last year and what they think that it’ll be this year and if you’re in the lowest brackets
  4. By Mid-December, finalize a strategy that you’re comfortable implementing to get the biggest tax bang you can

By the way; our Mid-December recommendation isn’t one we pulled out of our hat. Odd are you’ll get interim legislation before the Christmas recess on either new final regulations or the inevitable changes that are slated for change on December 31st. 

Either way, you’ve got to have a strategy ready in time. 

Of course if the rules change before year end, this could have been for naught but better to be safe than sorry. 

If you have any questions, email us by using our Contact form here and we’d be happy to give you our feedback. 

Note: Barry Capital Management clients have this process already being taken care of as part of our Wealth Management program offering.