By now you have heard plenty of speculation as to whether or not the tax cuts enacted by the Bush administration in 2001 and 2003, and temporarily extended in 2010 by President Obama, will again be extended beyond 2012. Allowing these cuts to expire will lead to significant changes in tax rates and deductions beginning in 2013. One element commonly overlooked is the possible return of qualified 5-year capital gain tax rates that were in effect at the beginning of the decade.
If the Bush tax cuts are allowed to expire, ordinary income rates for all tax brackets will increase and the 15% rate on long-term capital gains will no longer be in effect. Instead, long-term capital gains will be subject to a 20% rate for all taxpayers with ordinary income tax rates above 15%, unless they fall under the category of “qualified 5-year capital gains.” The IRS defines a qualified 5-year capital gain as capital gain from the sale of property that was acquired after December 31, 2000 and has a holding period of at least five years. Capital gains that fall under this category will receive 18% tax treatment; otherwise, the gains will be taxed at the higher rate of 20%. For taxpayers in the 10-percent or 15-percent ordinary tax bracket, a rate of 8% will apply.
We all may be paying more income taxes if Congress does not take action after the elections and the Bush tax cuts are not extended. As uncertainty remains and the end of the year approaches, it is important to keep in mind the different capital gains rates that may take effect in 2013. Now is the time to evaluate your investment portfolio and consider accelerating gains into the current year to take advantage of lower rates while they are still available.
For additional information or advice, please contact Cassady Schiller at 513-483-6699.