Tax Strategies for a Booming Market / Equity Prices Are Up, but So Are Taxes on Your Gains

Carolyn T Geer for the Wall St Journal writes:  Good news: Stocks are way up this year.

Bad news: Tax rates are up, too, and not just for the super-rich. Here's how to keep more of what you reap.

Retirement accounts: There is a good chance the soaring stock market has caused the percentage of equities in your portfolio to rise, throwing your desired mix of assets out of whack. Retirement accounts are a good place to look first to restore the balance. That is because there are no tax consequences to shifting money from one asset class to another inside a 401(k) or individual retirement account.

If you haven't already maxed out your contributions for the year, you also could add new money to those accounts, steering it to assets that are underweight. This would kill two birds: rebalancing your accounts and reducing your taxable income.

The 401(k) contribution limits for 2013 are $17,500 for those under age 50 and $23,000 for those 50 and older. IRA contribution limits are $5,500 and $6,500, respectively.

If you're not covered by a retirement plan at work, you can deduct the full amount of your traditional IRA contribution no matter what your income. If your spouse is covered but you aren't and your joint modified adjusted gross income is less than $188,000, your contribution is at least partially deductible. Same goes for covered single filers and joint filers with modified adjusted gross incomes of less than $69,000 and $115,000, respectively.

Taxable accounts: Thanks to the continuation of the 0% tax rate on qualified dividends and long-term capital gains for taxpayers in the 10% and 15% income-tax brackets, married couples filing jointly earning $72,500 or less and singles earning $36,250 or less can book gains in taxable accounts with no tax consequences. One strategy is to sell enough appreciated securities to "fill up" your tax bracket and then repurchase them, raising your "cost basis," or the value used to figure taxable gains (or losses) in the future.

Keep an especially close eye on the timing of mutual-fund distributions, which promise to be sizable this year. Most funds pay year-end distributions—dividends, capital gains or both—in December—at which point the fund's share price is reduced by the amount of the distribution.

If you are planning to buy fund shares before year's end, it might make sense to wait until after the fund has distributed its gains. Similarly, if you are planning to sell, you might want to do so before the distribution. Check the fund's website for the latest distribution estimates.

Tax-loss carryforward:

Taxpayers subject to either the 15% long-term capital-gains rate (joint filers with $72,501 to $450,000 in income; $36,251 to $400,000 for singles) or the new, higher 20% rate (joint filers with more than $450,000 of income; $400,000 for singles) should look to see if they have any "loss carry forwards," says Ida Yarbrough, an accountant in Los Angeles.

In any given year, you can use capital losses to offset capital gains dollar for dollar on your federal tax return. You can also deduct up to $3,000 in additional losses against ordinary income.

Net capital losses beyond that can be carried forward indefinitely to help offset capital gains and income in future years. This process continues every year until you've used up all of your losses.

"A lot of my clients still have humongous loss carryforwards to use," courtesy of the 2008 financial crisis, says Ms. Yarbrough.

Note: Carryforward net capital losses from pre-2013 transactions, which would have offset capital gains only at the old maximum 15% rate, now automatically offset gains at the new, higher rates, says Mark Luscombe, principal federal tax analyst for Wolters Kluwer.WTKWY +0.75%

Surtax on investment income: This year marks the start of a 3.8% surtax on net investment income. Although widely regarded as a tax on high-income earners, it kicks in at a lower income threshold than the top ordinary income and capital-gains rates. Specifically, it hits the lesser of net investment income (interest, dividends and capital gains) or modified adjusted gross income above $200,000 (for individuals) and $250,000 (for joint filers).

The threshold isn't adjusted for inflation, "so over time [the surtax] will catch more and more people," says Mr. Luscombe. Spread the recognition of income between 2013 and 2014 where feasible, and beware of income spikes that could put you over the threshold.

A common trap: Income from Roth IRA conversions isn't considered investment income for purposes of the surtax, but it is included in modified adjusted gross income.