Tax shock for investors taking capital gains

When the stock market is good, you’re supposed to take some money off the table. A semi-retired friend of mine did just that and got the tax shock of his life.

His smart investment move not only brought down the AMT on his head (that’s the alternative minimum tax that prevents people with above-average incomes from using tax shelters to wipe out their taxable incomes). He also ran into the new Net Investment Income Tax (3.8 percent) and new Medicare tax (0.9 percent) on joint incomes over $250,000, passed to help fund the Affordable Care Act.

My friend is normally not anywhere close to that rich. He chose to take some big capital gains that could have been deferred. The same tax shock probably hit people who were adjusting their investment allocations to prepare for retirement — selling stocks and buying bonds.

I never complain about the gift of high capital gains or nailing your profits while they’re there. You’d lose them if the market plunged and might not regain them for a while. Just be aware that the capital gains tax isn’t the only tax you’ll pay, if you take a really big slug of profits all at once.  If you stay just below the income limits for the new taxes, you’ll save yourself not only money but grief.


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Keith Whelan // 04/08/2014 at 10:02 am

Excellent advice. I don’t think many people are aware of the new health care taxes. I was told the LT capital gains tax itself has increased, too (from 15% to 20%?) though I’m not certain and don’t want to start rumors. One thing is for sure, though: the trend in tax rates is up.

Jane // 05/01/2014 at 3:42 pm

Singles with taxable incomes over $400K and marrieds over $450K, 20% on long term capital gains.
Singles over $250K and marrieds over $300K, phaseout of itemized deductions and personal exemptions.

The only gain for those in higher brackets is the larger exemption and lower top tax on estates. So, those with high earnings pay more, those with large estates pay less. Advantage: 1%.

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