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William Perez

Locking in Long-Term Gains at the Zero Rate

By September 18, 2012

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Individuals in the 10% and 15% brackets who have unrealized long-term gains in a taxable investment account should consider selling some of their investments to book long-term capital gain income in 2012 at a zero percent tax rate.

This year-end tax planning technique is described by Robert Flach, who writes over at the Wandering Tax Pro. In his recent post on What To Do, Flach writes, "This 0% rate is a great tax planning opportunity that should be taken advantage of to the max each year."

The tactic is to realize long-term gains if those gains will fall within the zero tax rate for capital gains.

For the year 2012, there's a zero percent tax rate applied to long-term gains from stocks, mutual funds and other capital investments. The zero percent rate is applied to long-term capital gains if the person's taxable income falls within the 10% or 15% tax brackets.  (Long-term gains are otherwise taxed at the 15% rate if taxable income is in 25% or higher tax brackets.)

Taxpayers may re-invest the gains back into the same investment (if they so choose) and thereby establish a new cost basis. In this way, taxpayers can extract some capital gains now at a zero rate as a hedge against any potential future tax rate increases. And even if those future tax changes never materialize, at least some gains were booked at the zero rate.

Readers may find the following resources helpful when analyzing this year-end tactic: 2012 Tax Brackets, Qualified Dividends and Capital Gains Worksheet (for 2011, but you can substitute the 2012 numbers, as Flach suggests).

This is the first of a series on tax reduction tactics that can be made before the end of the year. If you have a year-end tactic you'd like to share, I'd like to hear from you. Feel free to contact me.

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