Taxable capital gains
Now may be a good time to lock in stock market gains. You may want to harvest portfolio loses to offset any taxable capital gains. Or even, put funds in a tax sheltered retirement plan where the sales may have no tax implications. Such strategizing is particularly important to those in upper income tax brackets who need to reduce table capital gains. Last year’s tax-law changes created a variety of income thresholds, each triggering new taxes, higher rates, or loss of tax breaks. But each threshold is calculated differently. That means any taxpayers whose income puts them close to one of these new thresholds needs to pay close attention. So, before you sell, do a projection of your tax liabilities.
Stock evaluation basics
When determining your profit from a stock sale, it’s important to understand not only the formula, but the meaning of the variables in the formula. Certain circumstances can reduce your tax liability when you sell. Many taxpayers believe they must pay taxes on the full amount of the check they receive from the sale–not true. You can subtract your basis.
Basis is the cost of the stock plus any reinvested dividends and commissions paid for acquisition. If you inherited the stock, the basis is the fair-market value of the stock on the date of the decedent’s death or the alternate valuation date. If the stock was received as a gift, the basis is the lower of the fair-market value or the basis of the donor at the time the gift was made.
In Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (ATRA), which prevented income tax rate increases for most taxpayers and addressed many expired tax breaks. But ATRA didn’t provide as much relief to higher-income taxpayers. Many will see rate hikes on income exceeding certain thresholds.
- A phase-out of personal exemptions and itemized deductions, which is triggered when adjusted gross income exceeds $250,000 for individuals or $300,000 for couples filing jointly.
- A 3.8 percent Medicare surtax on net investment income for those with modified adjusted gross income over the $200,000 individual or $250,000 married-filing-jointly threshold.
- A new 0.9 percent Medicare tax on earned income above $200,000 or $250,000 for those married filing jointly.
- Higher tax rates, which go into effect once taxable income exceeds $400,000 for individuals or $450,000 for couples filing jointly. The top marginal rate jumps to 39.6 percent, from 35 percent for 2012, while the top tax rate on capital gains goes to 20 percent from 15 percent.