Tax rates may be going up in 2011. This may
affect your year-end investment tax planning

Normally, when you engage in year-end tax planning,
you might tend to sell stocks on which you have
incurred losses to offset those where you have gains,
in order to pay as little capital gains tax as possible. In
general that still applies. But the capital gains tax rate
is scheduled to go up in 2011 from 15 to 20% and
further in the ensuing years. This is unless Congress
steps in and changes the law to continue the low rate
that has been in effect since 2003.             

Given this, it may make sense to sell more of the high
gaining stocks now, if you were planning on selling
them over the next year anyway. Certainly, if any of the
following reasons are true you may want to sell your
gainers now instead of later:

1) You intended to take some money out of the stock
market in the near future.
2) You don’t like the future prospects of the stock.
3) You need to re-allocate your portfolio.
4) You have a large gain, you’re neutral on the
prospects of the stock, and you have enough losses
on other stocks to offset the gains now.  

However, you should not do this if you would not have
otherwise have sold your stocks over the next several
years. This is because you do have to pay tax on any
net gains, and if you delayed paying the tax for a few
years or more, you wouldn’t have to pay any tax at all
now. Delaying a capital gain for a number of years
could make the net investment worth more by enough
down the road to justify paying the higher capital gains
rate then. In other words, even if the gain is taxed at a
higher rate then, the compounded gain on the stock
and 20% of the earnings (what would have been taxed
away) will likely earn more than the difference in the
capital gains tax rate.

The “higher capital gains rate next year” concept also
creates the reverse logic on the stocks where you’ve
had losses. Normally you might want to sell them to
offset gains and accrue additional tax benefits. But
now the losses may be worth more next year if you
have gains to offset then. Some of your actions may
be guided by your expectations of next year’s stock
market performance. But a good strategy might be to
only use the   amount of stock losses this year that
leaves you with enough expected losses next year to
cover your expected gains next year.

And so the overall point would be to shift inevitable
realized overall gains to this year, and losses to next

Of course, none of this advice trumps standard
investment considerations. You should buy stocks you
believe will go up and sell those you think will go
down. But for those subject to the above conditions,
these rules may leave more money in your pocket.   

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Year-End Investment Tax Tips - Moves
to Make When Tax Rates May be Going
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