Investors and business owners have just a couple of weeks left to bet on what Congress will do in 2012 about capital gains tax rates and what effect any changes might have on profits from the sale of stock or a business. Some may want to move now so they can be sure to get the 15 percent capital gains tax rate, while others might decide to risk the expiration of Bush-era tax breaks at the end of next year and the chance that Congress will extend them again or even cut the rate.
The tax breaks originally were slated to expire after 2010. With an extension, they are now scheduled to last until the end of 2012, which could make next year the last opportunity to take advantage of the lower tax rate.
An investor who buys a stock by Dec. 30 could qualify for the 15 percent capital gains rate as long as the stock is held for a year and sold by Dec. 31 of next year. Stocks owned for a shorter period are considered short-term capital gains and the profits taxed at the ordinary income tax rate.
“I don’t think you should use the tax rate as a basis for making an investment,” said Nancy Skeans, a partner at Schneider Downs Wealth Management in Pittsburgh. “You make an investment because you believe it will pay an income stream or appreciate over time. But we never know exactly what that time period will be.”
Some financial advisers are predicting the top tax rate for capital gains could leap as high as 24 percent in 2013.
James Lange, a certified public accountant and attorney who owns Lange Financial Group, said he would offer different advice to taxpayers depending on their tax bracket.
Those in the 15 percent or lower tax bracket are not subject to capital gains taxes on income as long as their income falls below $69,000 for jointly filed returns or $34,500 for single filers for the 2011 tax year.
Assuming that someone is in the 15 percent bracket and that a capital gain would not push that person into the 25 percent bracket, Lange would recommend selling highly appreciating property either this year or next because there will be no capital gains tax for 15 percent taxpayers in either of those years.
“One of the arguments for doing something before year-end 2011 is that if you split a capital gain over two years, you could end up in the 15 percent bracket for both years, meaning there would be a zero capital gains rate total,” he said.
“If, on the other hand, you waited in 2012 to report a large capital gain, the amount of the gain might push you from the 15 percent bracket to the 25 percent bracket and there would be a tax on the capital gain.”
For taxpayers in the 25 percent bracket or higher, Lange would recommend waiting to see what, if anything, will change with the tax law.
“We don’t know that capital gains tax increases are going to happen or not,” he said. “There is even a chance that capital gains tax and qualified dividends will be reduced or eliminated.
“If you told people to sell in 2012, then sometime in 2013 we have new tax legislation that would reduce capital gains tax — which frankly many Republican candidates would probably want to do — in retrospect some people will be upset.”
Howard Davis, president of the accounting firm Davis, Davis & Associates, said another important year-end issue related to capital gains is traditional tax loss harvesting.
He said taxpayers can offset all capital gains in the current year by pairing current losses plus $3,000 in losses from previous years.
Send questions to Tim Grant at tgrant(at)post-gazette.com.
