Year 2011 Specific Investing Issues
Year-end planning in 2011 is particularly interesting as the tax rates are scheduled to increase in 2013. The following changes will take place starting in 2013, absent any new tax legislation:- Ordinary income tax rates will increase. The current six tax brackets ranging from 10% to 35% will disappear and in their place will be five tax brackets ranging from 15% to 39.6%. Ordinary rates apply to short-term gains and to dividends.
- Long term capital gains will be taxed at 20%, instead of their current 15% maximum rate.
- Qualified dividends will no longer be a distinction in the tax code. All dividends will be subject to the ordinary tax rates.
Cost Basis Reporting
Brokerage firms will start reporting the cost basis of stocks, bonds, mutual funds and other investment products beginning in 2011. Form 1099-B used to report the sale of investment products has been revised, and there's a new method of reporting capital transactions on Form 8949 and Schedule D. Investors may want to review the default options for reporting basis with their brokerage service.
Selling off Losing Investments
This tactic accelerates losses into the current year. Total capital losses offset total capital gains, and any net capital loss is deducted up to $3,000 per year. Any capital loss in excess of this annual limit carries over to the following year. Be aware that if you repurchase the same investment within 30 days (before or after) selling that investment at a loss, your loss will be deferred under the wash sale rules. On
Sell off Winning Investments
This tactic accelerates income into the current year, and is ideal when an investor expects her tax rate in the current year to be lower than her tax rate in a subsequent year. Investors can also sell off profitable positions in order to absorb capital losses carried over from previous years.You can even buy back your winners after you sell them off. That's because the wash sale rule only applies to reinvesting when you sold at a loss. The idea here is to accelerate profits into 2011 at the 15% rate, and then re-establish your position in the investment at a new cost basis and a new purchase date. When you then sell off the investment later, your gain will be smaller since you already booked some of the build-up in value.
Pairing Losses with Gains
This can be useful so that investors offset gains from some investments with losses from others. This tactic tries to minimize the total tax impact of selling investments at a profit by selling off investments with losses. This is a hybrid tactic that accelerates income and accelerates losses to create the smallest possible tax impact.
Deferring Losses until Next Year
Generally speaking, taxpayers don't need to defer losses on investment positions, since the tax code already has a provision for carrying over excess capital losses into a future year. Accordingly, the timing of selling off unprofitable investments can be driven by your investment strategy rather than tax considerations.
Deferring Gains until Next Year
Traditionally, holding off on selling a profitable investment can accomplish two tactics: it defers the income to another year, and you might be able to defer long enough to have long-term gain taxed at the preferred 15% rate instead of taxed as a short-term gain at ordinary rates. You might want to consider using this tactic instead of accelerating gains if you have significant capital loss carryovers.
