by Alvin Wolcott, CPA

In order to pay for Obamacare, Congress made two significant changes to the capital gains tax that require taxpayer’s to up-their-game to manage the tax. The new tax structure relies on incremental tax increases of 1%-5% at numerous income thresholds;  a “nickel & dime” approach.  Intricate planning is now required to minimize the tax.  We have summarized the new rules and provided some basic planning ideas.  However, we encourage those facing capital gains taxes to apply the rules to their specific situation before yearend to obtain the best result.
One key element of the new capital gain tax is that the old 2012 rates still apply when Adjusted Gross Income (AGI)  is less than $200,000.  So past planning strategies such as generating gains to fill-up the 15% tax bracket that incurred no capital gain tax-- still apply! But for those with AGI over $200,000, the complexity abounds.  The new Net Investment Income Tax also referred to as the 3.8% Medicare surtax applies to most gains when AGI exceeds $200K for Singles.  As in the past, the Alternative Minimum Tax which can effectively increase the capital gain rate to 28% and the Itemized deduction phase outs that add another +-1% kick in within +-$50K of this income range.  
The real sting hits when AGI exceeds $400,000 for Singles;  that’s when the new Capital Gain Tax rate increases to 20%.  In the end, you could face a marginal Capital Gains Tax rate in the range of 20% - 29% and the rate could go up or down with each additional dollar of gains.
Many taxpayers who may have enjoyed the lower 15% capital gains could potentially owe 1/3 more than in prior years and if they are in a higher tax bracket, they may owe almost 2/3 more, even if it is just because their income reaches the threshold due to a once-in-a-lifetime sale.
So now is the time to buckle up and draw up your battle plan.  Here are a few ideas:
  1. Lower your adjusted gross income-   Many of Capital Gain tax calculations key off of AGI so lowering this number is job 1;  it’s the number at the bottom of form 1040, page 1.
    Examples include: IRA or additional 401K contributions, moving expenses, business deductions, capital losses, rental losses, health insurance premiums or alimony payments.
  2. Take advantage of rate windows-   It’s possible to harvest gains and pay none of these taxes so don’t miss this opportunity.
  3. Give appreciated assets to charity- Higher tax rates increase the value of charitable contributions.  Most taxpayers can take a deduction for gifts of appreciated property and skip the Capital Gain tax.
  4. Give appreciated assets to family members-  If you are planning to make a gift (up to $14,000 free of gift taxes) consider gifting appreciated assets if the recipient is in a lower tax bracket and able to benefit from the 0% tax bracket.
  5. Hold on for dear life- Appreciation in property held at death generally skips the Capital Gain tax.  
  6. Consider Installment sales-  Installment sales allow any gain to be spread out over more than one year, potentially utilizing more of the lower Capital Gains tax brackets.
  7. Place appreciated property in an active trade or business- The Net Investment Income Tax generally does not apply to trade or business related investment gains.  
As always, don’t let the tax tail wag the dog. The economic results of any property transaction should drive the decision. The tax results can then drive the form & timing of the transaction.