As 2011 winds down, investors should consider several last-minute strategies
to improve their bottom line tax liability. Many of these strategies follow
traditional advice applicable to any year-end. Others, however, are unique to
2011, not only because of the continuing impact of the economy but also because
of major tax changes that are threatening for 2013, which is just a little more
than a year away.
Long- and short-term gains
Long-term stock gains and qualified cash dividends continue to be taxed at
the favorable maximum rate of 15 percent in 2011 and again in 2012. For
lower-income investors in the 10 and 15 percent income tax brackets, a zero rate
applies to stock gains and dividend income. Long-term capital gains rates apply
to stock (and other investments) held for more than one year. Qualified dividend
rates apply for stock held more than 60 days of a prescribed period around the
dividend's record date. Short-term gains are taxed at ordinary income rates and
apply to stock held for one year or less.
If your stock has declined in value, it may make sense to sell it and
recognize the loss. Capital losses have to be netted against capital gains, but
net capital losses can be deducted dollar-for-dollar against ordinary income, up
to $3,000 a year ($1,500 for married individuals filing separately). Excess
capital losses above $3,000 are carried over to the following year and can be
deducted against another $3,000 of ordinary income (after netting with any
capital gains in the succeeding year).
Wash sale rules
If you expect the market to improve, you may want to hold on to your stock,
even if it has dropped in value. It may be tempting to sell the stock, to
recognize the loss, and then repurchase the same stock;however, the tax code
under its so-called wash sale rules will not let you take the loss if you
purchase identical stock within 30 days before or after you sell your shares.
Another option is to sell your shares, wait 31 days, and then repurchase the
stock.
Timing
Stock traded in an over-the-counter market or on a regulated national
securities exchange is generally treated as sold on the date the taxpayer enters
into a binding contract to sell the stock. This is the trade date, in contrast
to the settlement date, when deliveries of the stock certificate and payment are
made (generally the fifth business day after the trade date). The trade date is
also the end of the selling taxpayer's holding period for purposes of
determining long- or short-term gain.
For short sales, however, the IRS insists on following a rule with a slight
twist. If the stock price falls and a gain will result, the gain is realized on
the trade date, when the seller directs his or her broker to purchase shares. On
the other hand, if the price rises and a loss will result, the loss is not
realized until the stock is delivered on the settlement date.
In either case, remember that for 2011, December 31 falls on a Saturday,
making December 30, 2011 the last day on which the public stock exchanges are
open.
Long-term holding period
This year, year-end tax selling strategies should also be coordinated with
year-end tax buying. In addition to the traditional attention given to the
wash-sale rules on the repurchase of securities, investors should be aware that
the rates on long-term capital gains quite possibility will be going up
dramatically after 2012, when the Bush-era tax rates end. In default of
Congressional action, the maximum rate on net long-term capital gains will rise
from 15 percent to 20 percent. Since long-term gain is available only on assets
held for more than one year, investors should be aware that the gain on stock
and other capital assets purchased after 2011 quite likely will be subject to a
higher tax rate. Year-end 2011 should therefore present an opportunity to get
your long-term investment strategies in order so that, if forced to sell at
year-end 2012 before a 2013 rate increase, you will be able to take advantage of
the lower long-term rates.
If you would like to further refine your year-end investment strategies,
please do not hesitate to contact this office.