Usually, investors in securities try to harvest capital losses at the end of the year. Those losses may offset capital gains and then a portion of your highly taxed ordinary income. But this year, the tax landscape has changed dramatically. Because tax rates are going up in 2013 – absent any new legislation – you could be tempted to pass up some losses and recognize more gains.
This could be one of those unusual times when it makes sense to pay tax on income sooner rather than later.
After capital losses are used to offset capital gains, you can use any excess loss to offset up to $3,000 of ordinary income in the current year. If you still have an excess loss, it can be carried over to next year when the entire process starts again.
Because capital losses may eliminate or reduce your current income tax liability, investors often seek out losses at year end.
However, there are unusual circumstances in 2012. First, the tax brackets will be adjusted upward in 2013, with a top rate of 39.6 percent replacing the current top rate of 35 percent. Second, the maximum tax rate of 15 percent on net long-term capital gain (zero percent for low-income investors) will jump to 20 percent (10 percent for low-income investors). And third, a special 3.8 percent Medicare surtax may apply to certain “net investment income.” Therefore, a high-earning investor may pay an effective federal income tax of 43.4 percent on some income.
Instead of aiming for tax losses, you might focus on realizing capital gains before 2013. This way, you can lock in the more favorable tax rates for capital gains in 2012, though you will not benefit from tax deferral.
Of course, every situation is different. Consider all the relevant tax and financial factors in your investment decisions.
Thomas R. Seitz is a certified public accountant with Wessel & Co. of Johnstown.