One of the greatest benefits of the tax code is the special tax rates that currently apply to gain recognized from the sale of capital assets held for more than a year (long-term). The special tax rates apply to virtually all capital assets including land, improved real estate, your main and vacation homes, and business assets in excess of the accumulated depreciation previously deducted. These rates also apply for the alternative minimum tax. The following are some issues and strategies that you may find of interest before year’s end.
Historically, the end of the year has been a good time to plan tax savings by carefully structuring capital gains and losses. Conventional wisdom has always been to minimize gains by selling “losers” to offset gains from “winners,” and where possible, generate the maximum allowable $3,000 ($1,500 for married taxpayers filing separately) capital loss for the year.
Assets that are not held long-term, referred to as short-term capital gains (STCG), do not receive benefits of the special rates afforded long-term capital gains. Taxpayers achieve a better overall tax benefit if they can arrange their transactions so as to offset short-term capital gains with long-term capital losses.
For those who would benefit from the zero LTCG rate in 2010, it may be appropriate to sell assets and create long-term capital gains to the extent those gains would be taxed at the zero rate. However, this is a balancing act since LTCG also increases your income, which may push you into higher tax brackets. Of course, you can also use losses to offset the gains, and contrary to conventional strategy, you should only have enough losses to keep the gain within the zero tax rates. If your income is too high to take advantage of the zero tax rates, then continue to employ the conventional strategies discussed above.
If you exercised incentive (qualified) stock options with your employer this year and you are still holding the stock, selling the stock before year’s end to avoid phantom income created by the alternative minimum tax may be appropriate.
If you are planning substantial gifts to charity or to relatives and have capital assets that have appreciated in value, gifting the appreciated assets rather than cash may be beneficial.
The actions mentioned above may have additional factors that must be considered and require careful planning. You are encouraged to consult with this office before acting on any of the suggested strategies.