The H Group Blog

Investment and Financial Planning news from some of the best in the business.

New Capital Gain tax rates?

Scott Maxwell - Tuesday, April 09, 2013

There are just more ways to tax us as the years roll by! The American Taxpayer Relief Act of 2012 introduced a new wrinkle in the way we think about capital gains taxes. Instead of thinking about two possible rates of tax on long term capital gains we now have to think about three. The Act added a new capital gain rate of 20% for lucky folks with incomes over $400,000.

But wait, there’s more. The Patient Protection and Affordable Care Act (Obamacare) also created a new Medicare tax of 3.8% on AGI over $250,000 for joint filers. This new tax might apply to those who are paying capital gains at 15% and it will certainly apply to those who are n the new 20% capital gain bracket. So we really have four and perhaps five new rates at which our capital gains might be taxed.

“OK, so I’m paying higher taxes, what else is new?” you say. The interesting wrinkle is that this new regimen of taxation turns traditional tax planning for capital gains on its ear. Heretofore we might delay paying tax on gains as long as possible, because it’s better to pay 15% later than to pay 15% now. But now there is the possibility that we might want to pay taxes on those gains in a low tax year rather than assume deferral will help us. It really depends on our situation of course, but if folks anticipate being subject to the new Medicare tax or the new Medicare tax plus the new 20% gain rate at some point in the future then paying the tax in lower earnings years might make more sense.

In addition to the timing of gains we have to think about the timing of losses. No sense carrying forward losses that will offset a low rate gain! The investment process will of course continue to be the most important consideration as we think about our various investments but all things being equal it may make more sense to defer losses into years when they offset higher rates rather than lower.

Michael Kitces develops this in a bit more detail and Laura Saunders from WSJ expounds on the same concept in an earlier article.

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