Tax Advice: Sell Your Stocks in 2012

With the tax cuts set to expire at the end of this year and the addition of the new Medicare tax potentially hitting your investment income beginning in 2012, many taxpayers should consult with their tax advisors to determine if it may be beneficial to harvest their capital gains.  

Beginning in 2013, long term capital gains tax will increase from from 0% to 10% in 2012,  to 15% to 20% in 2013. Add in the 3.8% Medicare surcharge and now your effective rate on long term gains can be 23.8%. Even worse, short term gains and ordinary investment income from dividends, interest income, etc. can be taxed as high as 43.4% in taxes  (39.6% tax bracket plus the Medicare surcharge).  This doesn't even figure in any taxes to your state nor any penalties that may apply from the "Affordable (Health) Care Act" in future years.

So it might be time to consider selling any stocks with gains by December 31, 2012, even if you want to stay in the same stock.  You can repurchase the stock immediately after your sale.  The disadvantage – you’re paying taxes today with today's dollars.  The advantage – you’re paying taxes at the  lower tax 2012  rates and, if re-investing in the same or any other stock, you will have a stepped up basis for all future gains. This will minimize future taxable gains at future HIGHER tax rates.