As you can imagine, I have heard a lot of panic from clients since the election results came in last month. Some panic is warranted, as most acknowledge that the 2% payroll tax reduction will not be extended, capital gains will likely be increased to 20% or 25% at most, and that tax rates will likely be increased for married couples with AGI over $250k. However, when it comes to capital gains, panic can actually be very detrimental and cost you much more in taxes than you would think.
Naturally, you would assume accelerating a large capital gains to take advantage of the 15% rate would result in large tax savings, but unfortunately the alternative minimum tax erodes the tax savings if you are a high-income taxpayer. In fact, most of the time it results in an overall tax rate between 20% and 25%. Why this happens is very complex and even CPAs get frustrated in fully understanding the alternative minimum tax, but here is the best explanation I could find. Basically, if a large amount of your income is long-term capital gain income and you are a high-income taxpayer, the AMT tax can kick in and erase the benefit of the 15% rate. We witnessed this quite a bit back in 2010 when financial advisers worried about the expiration of the 15% rate and advised their clients to sell off their low basis stock. It sounded like a great idea at the time, but when preparing the tax returns in 2011, many were surprised at how AMT tax erased much of the benefit. Well, the same thing can happen for tax year 2012 if you give in to panic.
Before you make any big moves on capital gains before year-end, talk to your CPA and and have them run a projection to see what the true impact would be. It may just be that there is no need to panic.