If the Bush tax cuts are allowed to expire at the end of 2012, tax rates on long-term capital gains will increase substantially in 2013. To combat the increase in future taxes on their investment portfolio, taxpayers should consider and determine whether capital gain harvesting is an appropriate tax planning strategy for their situation. Have you?

Capital gain harvesting is a method where an investor liquidates long-term investments with unrealized gains in the period before capital gain rates increase. The investor would then immediately reinvest the sale proceeds into the same stock, thus establishing a new cost basis. The new shares would then be sold whenever the investor’s buy/sell strategy would have sold the original shares. In essence, capital gain harvesting allows an investor to buy tax savings in the future by paying a lower tax rate today.

The decision about whether to harvest capital gains is complex. At times, the method will be very favorable, but often it will not. The key variables to analyze in order to determine if capital gain harvesting is an appropriate option for you include:

• The time period between the capital gain harvesting sale and the sale date of the repurchased stock;
• The difference in capital gain tax rates between the two sale dates;
• The growth rate of the individual stock being harvested; and
• The investor’s opportunity cost of capital.

Generally speaking, the shorter the time period between the harvesting sale date and the second sale date, the more favorable capital gain harvesting could be. Thus, a portfolio using a buy-and-hold strategy will be less likely to benefit from this tax planning method.

With the expiration of the Bush tax cuts on the horizon, tax planning is more important now than ever before. Contact Flexible Accounting Services of the Triangle and allow us to assist you in minimizing your future taxes.