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I still have a hard time convincing current and potential clients that your tax expense is a year-round game, not just something you look at in April of each year.  Some think they can do some planning at the end of the year, which is smarter than most, but the truly savvy taxpayers minimize their taxes as part of their overall personal finances, and it’s something that should be done all the time.  For a majority of you, taxes are your largest expense, yet we all fall into the trap of paying more attention to budgeting for groceries or for recreation (penny wise, pound foolish).  It’s time you start paying less taxes and use that money for something else!  This article is an example of something you can start planning for now instead of at the end of the year.

First off, no, that’s not a misprint in the title of this article.  You can actually qualify for a zero percent tax rate on some or all of your long-term capital gains realized this year (2013).  This tax break was recently extended by the American Taxpayer Relief Act (ATRA), and it isn’t necessarily off limits to tax payers who are doing just fine financially.

The strategy here involves figuring out how much capital gain you might be able to fit under the thresholds (see the table at the bottom of this article).  The zero percent tax rate applies to taxpayers who end up in the 10% or 15% regular income tax bracket.  For instance, you may qualify for preferential tax treatment if your business incurs a loss this year or you defer a substantial amount of income to future years.  Another idea – you also might switch some of your capital gain assets to your children or grandchildren who are eligible for the zero percent tax rate.  Now that’s really crafty – Yet perfectly legal!   Now, this type of strategy (and I will send you more as I can write the articles) involves careful planning that should be started in the beginning of the year, not at the end. You can easily back yourself into a corner very easily and not be able to implement this strategy.  There are ways to limit your ordinary income if you plan carefully…but each day that passes in the 365 day year decreases your chances of being able to do that.

Now, single filers with taxable income above $400k and joint filers above $450k will pay a 20% rate on their long-term capital gains.  If there is no way for you to get your income below that level (let’s talk to make sure that is the case), then this strategy may not work for you, but other strategies might (such as federal land conservation easement tax credits which can reduce your taxable income by up to 50%).   Again, see the table below…it will pay to reduce your taxable income this year if you can.

Another example – let’s say you are self-employed.  You’re a joint filer and normally in the 33% tax bracket.  However, due to unusual circumstances (or certain changes to your accounting methods or other good planning techniques) in 2013, you only expect your self-employment income to be 50,000, plus you work with Credo and figure out how to cut your taxable income 20,000 through other types of deductions.  This gives you plenty of room to maneuver on sales of securities or other assets.  Let’s say you sell appreciated stock you’ve owned for 10 years at a $50,000 gain.  Because your total taxable income of $70,000 is still below the cut-off of $72,500, your entire long-term gain is effectively tax free –that’s enough tax savings to install that top of the line home theater (or new kitchen) you’ve been dreaming about!

Please note that it doesn’t have to be an all or nothing proposition.  For instance, say that your taxable income before counting capital gains is $52,500 instead of $20,000.  In that case, $20,000 of the gains from the sales qualifies for the 0% rate, and the remaining $30,000 is taxed at the 15% rate – a total tax of $4,500.  That’s still a great deal!

One last thing to remember is that the 0% capital gain rate only applies to assets held longer than one year.  Short-term gains are still taxed at ordinary income tax rates (in other words, ridiculously high rates).  This makes holding your investments for at least a year a significant advantage in mitigating tax expenses, and your return on the investment after the net effect of taxes will be much higher.

Can you now see why these more lucrative tax strategies require very careful planning?


Single Filers                            Joint Filers                               LT Capital Gains Rate

$0 to $36,250                          $0 to $72,500                          0%

$36,250 to $400,000         $72,500 to $450,000               15%

Above $400,000                    Above $450,000                    20%

Dan Lucas
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