Traditionally, taxpayers have been advised to accelerate deductions and postpone income in an attempt to pay less income tax. Although the Alternative Minimum Tax has made this difficult in prior years, the adage of postponing recognition of income and accelerating deductions was fairly standard tax advice. Depending on your particular circumstances, it may make sense to do the opposite: Recognize more income in 2012 and take less deductions or losses.
One of the best examples of a change in tax philosophy can be shown in harvesting capital losses. In the past when tax rates were level, taxpayers might sell an investment at a loss, wait 30 days and repurchase it on the 31st day (the required Internal Revenue Service waiting period). The loss can be applied to future gains, or carried over if unused, with a $3,000 annual limit of offsetting current income ($1,500 if married filing separately). At the end of each year, sales of investments producing gains can be offset by the current or prior losses.
If, however, taxes on future investment gains are higher, it may be better to actually take gains and pay the lower capital gains tax in 2012 rather than at a higher future rate. For those in the lowest capital gain tax brackets, the capital gains rate of 0 percent in 2012 would be preferable to the higher rate in 2013. Although the IRS requires you to wait 31 days to repurchase an investment when you take a loss, there’s no such requirement when you take a gain. In that case, you can immediately repurchase the investment.
The advice might be different for those who have significant existing carry-over losses. In this case, normally one would sell a position with a gain and use the carry-over loss to offset the newly realized gain. If, however, gains are taxed at a higher rate in the future, you may not want to take gains to offset losses in this current tax year. Instead, you might want to keep your losses to use in future higher tax years.
Most importantly, the best thing for each person to do is examine how the application of any strategies would affect their specific situation. For instance, taking capital gains at a lower rate in 2012 may inadvertently drive up the level of tax on Social Security income. Additionally, creating capital gains can affect a taxpayer’s AMT.
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