Is 2011 your last chance to position yourself for 15% capital gains?

July 1, 2011

© 2011 by Michael C. Gray


2011 might be your last chance to position yourself for long-term capital gains eligible for the 15% maximum federal tax rate for long-term capital gains.

The Bush tax cuts, which were extended to 2011 and 2012 are scheduled to expire after next year. If Congress does nothing, the maximum long-term capital gains rate will increase to 20%. In addition, the 3.8% Medicare tax on investment income when adjusted gross income exceeds $200,000 for singles and $250,000 for married filing joint returns enacted as part of the Health Care Reform legislation will also become effective after 2012, so the maximum long-term capital gains rate for high-income taxpayers is scheduled to be 23.8%, or an increase of more than one-third!

The National Commission on Fiscal Responsibility and Reform issued its report, “The Moment of Truth”, during December 2010. The report includes proposals for tax reform. Among its proposals is to eliminate preferential tax rates for long-term capital gains and qualified dividends, and taxing these items of income at ordinary income tax rates.

The proposal is to broaden the tax base and reduce federal income tax rates. Although the proposal is stated to repeal the alternative minimum tax, it’s closer to repealing the regular tax and replacing it with the alternative minimum tax. The proposal is strikingly similar to the Tax Reform Act of 1986 that was passed when Ronald Reagan was president. If history repeats itself, the “new” system will probably gradually erode under future Congresses with new higher tax rates and restored preferences for long-term capital gains.

Meanwhile, we need to think about the next few years. It seems likely that we will not see a 15% maximum tax rate for long-term capital gains for some time after 2012.

In order to qualify for the long-term capital gains rate, you have to hold capital gains property for more than one year. That means you will have to acquire the property before December 31, 2011 in order to qualify for long-term capital gains rates before they expire after 2012.

Some employees who are holding employee stock options should consider exercising them this year. In addition, some taxpayers should consider taking capital gains during 2012. The “wash sale” rules do not (currently) apply to capital gains, so you can sell stock to qualify for the long-term capital gains rate and repurchase the stock immediately after the sale.

These statements are oversimplified. Please don’t take actions with significant tax and financial results without consulting with your tax and financial advisors.

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