Harvesting Tax Gains – Guest Blogger Todd Roberts, CPA

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Todd Roberts is a regular reader of SenneySays.  Todd forwarded the following article he wrote on “Harvesting Tax Gains.”   This article is well-written and quite timely.  Check it out below.

HARVESTING TAX GAINS (abridged and reprinted with permission)

Most tax planners are familiar with the capital loss harvesting strategy.  Under this strategy, a taxpayer sells a security at a loss, recognizes the decline in value and receives a tax deduction in the form of a capital loss.  To restrict taxpayers from simply claiming tax losses any time they want with no real change in their economic position, Congress enacted the “wash sale” rules.  Under these rules, a taxpayer will be denied a deduction if the taxpayer sells a security at a loss and buys the same security within 30 days before or after the sale.

While these “wash sale” restrictions prevent a taxpayer from selling a security at a loss and buying it back immediately, there is no such restriction on recognizing a gain for tax purposes.  Thus a taxpayer can sell a security, recognize the gain, and buy the security back immediately.  The result of such a gain harvesting transaction is that gain is reported at current tax rates and the cost basis is increased to the new buyback price, which results in smaller future gain or bigger future loss.

With the expected expiration of the “Bush tax cuts”, taxpayers in higher income brackets face an increase in capital gains taxes from 15% to 20%, along with the 3.8% tax on investment income courtesy of the healthcare legislation commonly called “Obamacare”.  These taxpayers would therefore be wise to investigate this opportunity in 2012.

This strategy can also be effective for taxpayers with low taxable income.  For taxpayers whose taxable income without regards to capital gains fall within the bottom two tax brackets (up to $70,700 of federal taxable income after deductions for married couples, or $35,350 for singles) the long-term capital gains tax rate is ZERO percent (0%)!   This means a taxpayer can sell a security with a cost basis of $50,000 for $70,000, report a $20,000 capital gain, pay no federal tax, then buy back the same security which will then have a tax basis of $70,000.  The taxpayer gets the equivalent of a free step-up in basis.

Adult children who are out of college but not earning much may be able to take the advantage of this break.  High income parents or grandparents can give appreciated stock to their children and the children can sell at the zero percent rate instead of the parents’ or grandparents’ 15% rate.  You must be cautious not to trigger the “kiddie tax” in these instances and the gift needs to be legitimate.  Taxpayers in the lower brackets must also be aware that while the tax rate on capital gains may be 0%, the gains are still counted in income, which may impact the deductibility of itemized deductions, the taxability of Social Security benefits, or generate a state income tax.

As 2012 winds down, and we all stand waiting to leap off the fiscal cliff, you should be reviewing every potential avenue to reduce future years tax liabilities. Harvesting capital gains is an excellent opportunity to do just that.  If you have any questions about gain harvesting or other tax matters, you should consult your professional tax advisor.

Thanks again to Todd Roberts CPA for writing this article as Guest Blogger.   If you have written an informative article or would like to see a topic addressed in SenneySays, please give me a call or email at  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. The BWC  offers grants under several programs including the Drug Free Safety Program (“DFSP”) and the Workplace Wellness Grant Program (“WWGP”).   If you have any questions about these programs, Sarah Carter can provide more information.  Feel free to call or email Sarah Carter at Scarter@pselaw.com or 937-223-1130.