Think Outside the Box – Investment Tax Planning Strategy for 2012

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It is common knowledge that no matter who wins the Presidential election, tax rates will be changing in 2013.  Where they will go, no one knows, not even the legislators who will be making the decisions can predict.  Even if the Republicans and Democrats can not come to a consensus, the tax rates for capital gains are set to increase from 15% to 23.8% for long term sales, and 35% to 43.4% for short term sales in 2013.  (These rates include the additional Medicare tax of 3.8% and assume the highest ordinary income tax rates for the short term investments.)

Anyone who has investments knows that one of the major tax planning strategies at year end for investors is to “harvest the losses”.  By definition this means that if you have any stocks that have losses associated with them, you sell those off at year end in order to decrease your taxable gains for the year.  Daszkal Bolton Family Office would like to suggest a different strategy for those investors who want to maintain their current stock holdings, yet want to take advantage of the lower tax rates available for 2012.  We propose you consider “harvesting the gains” through wash sales.  Of course, the investor needs to have cash liquidity available to cover the taxes that will be owed.  But, if you are one of those investors, this idea may be for you.

What is a “wash sale”? The IRS is very particular about receiving their tax revenues.   If you sell a stock and then within 30 days repurchase that same stock, you have a wash sale.  If there is a loss on that sale, the IRS does not allow you to recognize that loss for tax purposes and the loss gets added into the cost basis of the new stock you repurchased.  But if you have a gain, the IRS recognizes that gain and you are required to pay taxes on it.  We suggest that investors consider selling their low cost basis stock to realize the gain in 2012, then immediately purchase the same stock back. The investor now has a higher cost basis for that stock, and when selling it in later years will recognize a much lower gain and pay much less in taxes at a much higher tax rate.  Essentially, the investor is hedging their bet that the tax rates will go up and the stock will continue to increase in value. The investor will pay the taxes on a majority of that future gain at the much lower current rates, thus decreasing the overall tax they would pay on an individual investment.

This strategy isn’t for everyone, as no tax planning strategy ever is.  But, if you are an investor with low basis stock investments, have the liquidity available, and believe that the tax rates will be increasing, then this strategy may very well work for you.  Speak to your investment advisors and discuss which stocks might be best suited for taking advantage of this tax planning strategy. 

Sometimes the best options to consider are the ones that are outside of the box.  You never know the savings you could create until you look into it.

Daszkal Bolton LLP has significant experience serving the complex needs of high net worth individuals and families, seeking to achieve their financial goals, protect their assets, and enhance their wealth. Serving South Florida, especially Palm Beach, St. Lucie, Martin and Indian River Counties. If you would benefit from Family Office Services, please contact Jennifer Lynch Ridgely, Principal–in–Charge of Daszkal Bolton Family Office by telephone at 561.367.1040 or [email protected]. In a brief consultation, she can discuss your needs and the best way to proceed. 

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