Asher headshot.jpgCONTRIBUTED BY
Asher Bearman

Tax planning can be challenging at any time of year, but this year may be more challenging than normal.  As with any presidential election year, there is a lot of legislative uncertainty leading into 2013.  Adding even more fuel to the fire, there are a number of significant tax rate changes scheduled to occur at the end of 2012 unless Congress steps in with a last-minute change.  Given the election year, an affirmative action by Congress seems very unlikely prior to November, which could result in last-minute planning for many investors. 

Pending Tax Rate Changes – Capital Gains Increasing from 15% to 25%

One significant tax change set to hit at year-end is an aggregate effective increase in the long-term capital gains rate from 15% to 25%, due to the following: 

  1. The long-term capital gains rate (for capital assets held for at least a year) is scheduled to increase from 15% to 20%.
  2. Itemized deductions will be subject to phase-out, effectively increasing the long-term capital gains rate an additional 1.2%.'Tea Party tax day protest 2010' photo (c) 2010, Fibonacci Blue - license:
  3. An additional 3.8% Medicare tax on investment income applies starting in 2013.


Planning Ahead

Typically, taxpayers consider realizing long-term capital losses at the end of the year to offset ordinary income (being mindful of running afoul of ‘wash sale’ rules that penalize buying and selling the same security in a 30 day period or similar concerns). 

This year, however, typical planning may be placed on its head.   If the long-term capital gains rate goes from 15% to 25%, investors may want to delay realizing long-term losses until next year when the tax losses may be larger and realize tax gains before year end while the rates are still at 15%.  Assuming these tax rate changes go into effect and investors engage in this type of tax planning on a wide scale, it could result in some unusual market activity at the end of this year.

Given the legislative uncertainty, investors in the public markets probably will be wise to stand by and see what happens in November.  However, the pending changes will also be significant for investors in private companies.  Tax rates are not as likely to be a factor in these transactions, but there may be circumstances where this will make a significant impact.  For example, investors looking to sell their stock in a company may want to try to accelerate such a sale into 2012.  For them, the decisions will be more complex as it may take longer to consummate a transaction than 30-60 days at the end of the year.

Anyone thinking about year-end tax planning should contact your tax advisor for more detail.  We will continue to monitor the issue on The Venture Alley.  For those looking for additional information, here is a summary that I received from contacts at PricewaterhouseCoopers addressing the possible tax changes in further detail:

PFS Planning Update Capital Gains.pdf