Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Wednesday, December 14, 2011

Last Minute Tax Planning: Low Taxable Income


If your 2011 taxable income (line 43 IRS 1040) is going to be below $69,000 married or $34,500 single then you need to look at your taxable investment accounts and maybe sell and buy back (if prudent) to enable you to “recognize” long term gains this year. (This is not about short term, less than one year, gains.)

Why? No long term capital gains tax is due if your taxable income puts you in the 10 or 15 percent tax bracket. The law changed in 2008 and expires at the end of 2012 when long term gains tax rates go back to 20%.  This will increase your “basis” in the holding and allow for fewer taxes on future gains than if you just continued holding these securities (assets).  This does suppose they continue to go up in value.

At this time of year we advisers are looking to “harvest” long term gains and offsetting losses to increase the “basis” of holdings. This is good tax planning in most years.  It may not be that good this year, but for reasons not germane to this missive. Call or write to ask about this.

For the past couple of years and for the next year (2012), those taxpayers finding themselves in lower brackets should take advantage of this incentive to sell long term holdings that have increased in value.  If prudent, they can buy them back immediately without a waiting period which involves selling long term capital losses (wash-sale rule).

Your tax advisor or financial planner should always be consulted before implementing this kind of strategy. Why? Just selling for tax reasons, may not be the best strategic move for your portfolio. That’s why this discussion is for education and not actual advice. “Your mileage may vary” YMMV as they say in the text world.

A special thank you to Michael Kitces, author of the Kitces Report, www.kitces.com for reminding us planners to highlight this issue again this year.

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