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:
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.
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