Prospective changes in the capital gains tax rate after 2012 may motivate investors to sell holdings that have appreciated. Capital gains rates are set to go up 33% in 2013, and a proactive capital gains strategy may save you some money.
There is a generally accepted principal that is regarded as standard advice in taxation, “Postpone paying taxes for as long as possible.” On offshoot of this principal is holding onto stocks and letting them appreciate to postpone payment of capital gains taxes.
Consider this, speeding up the payment of capital gains to the government this year. Why? Bush Tax cuts expire, and there may be higher capital gains rates down the road.
The Bush tax cuts are set to expire at the end of this year. The current rate on capital gains is 15%. The rate may rise to 20% in 2013, barring an extension. Most people in the industry do not expect a capital-gains tax cut any time in the near future.
The rush to pay taxes is not right for everyone. This generally applies to investors who have held investments longer than one year.
Older investors can avoid taxes by passing these stocks to their heirs with a stepped up tax free basis. Also, investors with strict investment methodologies should not make trades based on taxes.
Some investors are considering their long-time holdings and selling some of them— recognizing the gains — and paying taxes on stock gains at the current rate, rather than the future one.
This plan is not right for everyone; however there are circumstances when investors have made significant gains in a stock. They want to remain long term investors, and they can guarantee one of the lowest gains rate they are probably going to get.
Typical long term investor buys Ebay Inc. 10 years ago and has a gain of more than 100%, rushing the tax bill could save money.
For example you put $50,000 into Ebay 10 years ago, and it’s worth $105,000 today.
Sell now —gain of $55,000 — makes a tax bill of $8,250 at today’s 15% capital-gains tax rate.
Say the capital gains rate becomes 20%, the tax bill on that same gain would be $11,000, a difference of $2,750.
An investor can decrease their tax bill 33% on certain items. This is something to mull over as you analyze and work on your portfolio. There is still a lot of time left this year; run the numbers and make the calculations. The 15% capital gains rate may not be extended, creating value in accelerating gains this year. The greater the tax increase, the greater the savings by doing it this year.
The preceding information is not intended to replace the services of a professional. Consult a CPA or an Attorney who can better understand your particular circumstances. Please contact us.