Security Transactions
Tax Savings for Investors in Securities
You have the opportunity to control the taxable year in which to realize gains and losses. Gains and losses are realized when you sell, and if there are no market pressures, you can time sales to your advantage. To profit from the low 5% or 15% tax rate on long-term capital gains, pay attention to the more-than-one-year holding period for realizing long-term capital gains on the sale of securities.
Realizing long-term capital gains will give you tax savings. However, substantial gains can reduce other tax benefits and create AMT liability.
- Do not overlook the fact that realizing substantial capital gains may subject you to the exemption phaseout and/or 3% reduction of itemized deductions. The 3% reduction increases the effective capital gain rate and, depending on the number of exemptions phased out, the effective rate will be still higher.
- Long-term capital gains receive the same preferential rate under the AMT as they do under the regular income tax. In theory, they shouldn't cause you to pay alternative minimum tax. In practice, it's possible to be stuck with AMT liability because of a large capital gain. The reasons are a little complicated, but mainly have to do with the fact that a large capital gain reduces or eliminates the AMT exemption amount, which is designed to protect low-income taxpayers from having to pay alternative minimum tax.
If you have losses, the $3,000 limitation ($1,500 if married filing separately) on deducting capital losses from other types of income is a substantial restriction. If you have capital losses exceeding the $3,000 (or $1,500) limit, it is advisable to realize capital gains income that can be offset by the losses.
