Chicago Tax Lawyers

One might not expect capital gains to be much of an issue this year as America is still in the midst of extended economic downturn.  Despite high unemployment, however, the stock market has rallied through 2010 and many investors are finding themselves faced with complex planning for the end of the 2010 tax year.  The majority of the complications stem from what is slated to happen on New Year’s Eve: the sunset of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), the principle component of the Bush tax cuts.  Although time still remains for Congress to pass laws preserving some of the tax cuts or lessening tax raises, it is almost certain that at least some Americans will incur higher taxes in 2011.

Right now the highest bracket for regular income and short-term capital gains for noncorporate taxpayers is 35%.  In the worst cast scenario, when EGTRRA expires and no new laws are passed, that rate will increase to 39.6%.  Long-term capital gains are currently taxed at 15% and with the expiration of EGTRRA they would be taxed at 18-20%.

In calculating capital gains for tax purposes one looks at the net gain or loss.  Losses offset gains.  For these calculations short-term and long-term losses and gains are kept separate, i.e. short-term losses must be applied to offset short-term gains before they can be applied to long-term gains and vice versa.  Up to $3000 of net capital losses, short- or longterm, can be used by noncorporate taxpayers as a deduction against ordinary income in a given year.

In general it is most beneficial for a taxpayer instead of using long-term capital losses to offset long-term capital gains to those long-term losses to offset short-term capital gains or regular income since they are taxed at a higher rate.  This can be accomplished if long-term capital gains are not realized in the same year as long-term capital losses.

In making such a calculation one must consider more than just tax benefits.  Investment factors much be considered as well.  Holding off on recognizing a capital gain might have positive tax consequences but those benefits might not be worth the risk if it is likely the asset will depreciate in value next year.  Insofar as it fits within sound investment planning, taxpayers should try to avoid recognizing long-term investment gains and losses in the same year.  With the capital gains rates slated to increase next year, 2010 is likely a good year to realize gains, saving the recognition of losses for 2011’s higher rates.  Even if a taxpayer does not expect to recognize any capital gains in 2010 if they expect to realize losses greater than $3000 in 2011 it may be beneficial to recognize some of those losses in 2010.

As with all investment and  tax planning every situation will be different and the complexities of any given scenario are best explored with professional help.  For assistance with year end tax planning or other tax issues, contact the Chicago attorneys at Horowitz & Weinstein.

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