Most of us have heard through the major media outlets how tax law changes will adversely affect our overall income taxes here in 2013. It doesn’t take a rocket scientist to realize that when your expenses consistently exceed your revenue, cost cutting alone won’t improve your bottom line. This means that raising various types of taxes will definitely be one strategy to increase revenue in order to pay off the massive U.S. debt. The American Taxpayer Relief Act (ATRA) of 2012 was passed by Congress on January 1st, 2013 and was only a partial resolution to the fiscal cliff; just wait until fiscal cliff part II which will look more like ‘Hangover Part II’, Mike Tyson tattoo and all. While the ATRA did impose more taxes on the upper end of the scale and raised capital gains taxes on the very upper end of the income brackets, there is a unique opportunity for many Americans to look at their overall portfolio and potentially pay 0% in capital gains tax here in 2013. Here is how the tax brackets will work for long-term capital gains rates for 2013:
Here is how the tax brackets will work for long-term capital gains rates for 2013:
|Long Term Capital Gains Table 2013 (All income numbers are modified adjusted gross income)|
|Individual Tax Filers||Joint Tax Filers||Long Term Capital Gains Rate|
|$0 to $36,250||$0 to $72,500||0%|
|$36,250 to $400,000||$72,500 to $450,000||15%|
|Above $400,000||Above $400,000||20%|
Now, it’s important to remember a few things before discussing strategy. First, what is not intuitive in the capital gains table above is that at the $200,000 Modified Adjusted Gross Income level for single filers and the $250,000 Modified Adjusted Gross Income level for married filers, a 3.8% surtax will go into effect, here in 2013, due to Obamacare kicking in. This means the 15% long term capital gains turns into 18.8% and the 20% long term capital gains turns into 23.8%. Secondly, remember that these capital gain rates only hold true for assets you hold longer than one year. Assets that you hold and sell before twelve months will still be taxed at your ordinary income rates. This means it is important to really look over when you sell assets here in 2013. Lastly, you need to consider what type of long-term capital gains carry forward you will have for 2013.
Remember, you can match an unlimited amount of long-term capital gains against your carry forward capital losses. While you can only offset up to a maximum of $3,000 of long-term capital gain loss against your ordinary income, one important consideration is to look at the gains you have made in the stock market or other equity investments the past few years to see if you have losses that you took in prior years that can be offset by those gains. Matching those gains and losses will effectively result in a zero percent capital gains tax.
If in the 2013 tax year you have an anomaly with your income such as a year of unemployment, you retire, or you are already retired, you should carefully plan out the sale of your assets that carry long term capital gains right up to the tax brackets discussed above so you are able to still pay zero capital gains tax. Even those of you who are between the 15% bracket and the Obamacare threshold will still only pay 15% for the sale of an asset that you have held for the long term. Perhaps this is also a year you are selling a rental property that has lost money, starting a business that will have losses, or some other situation which should encourage you to more closely plan your overall 2013 tax strategy.
Since these decisions are crucial to make before year-end, I recommend you get with your CPA, accountant, or financial team over the next few months. Even though the tax laws get more complex each and every year, the smart money move here in 2013 is to see if you qualify for building a strategy that can make your capital gains tax vanish.
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