|DAVE CARPENTER, AP Personal Finance Writer|
Less than three months remain until the maximum rate of 15 percent on long-term gains rises to 20 percent unless
On top of that, the health care reform package imposes a new 3.8 percent
The looming increase poses a tempting reason to sell now for anyone who's sitting on large unrealized gains in stocks, property or other assets. But pulling the trigger on a sale hastily could be a mistake.
A couple of
It's not just millionaires with money at stake. Plenty of retirees who regularly sell off some of their portfolio for living expenses could face heftier bills on stocks, mutual funds or bonds that have grown appreciably in value over the years.
Those inclined to overreact by selling now without analyzing their situation would be wise to heed the old
"Keep in mind that first and foremost it's about making a gain," says Heider. "The key is making money."
With that caveat in mind, here are five tips for approaching the possible capital gains tax hike:
1. DON'T HOLD A FIRE SALE.
Do some basic math, or have a financial adviser do it for you.
"If you're selling just because rates are going up, think twice," says
Start by reviewing your portfolio to determine which investments have risen significantly in value since you purchased them. Think about when you are likely to sell. Then crunch the numbers on how much tax you'd pay by selling now or later. Refer as needed to an online capital gains calculator such as http://www.moneychimp.com/features/capgain.htm.
Selling now means you'd be left with a smaller sum of money or other assets to grow. So factor in lost opportunities for the assets to appreciate in years ahead. Plus there's the out-of-pocket cost.
2. KEEP IT IN PERSPECTIVE.
Remember that the past decade has been an era of very low taxation by historical standards. A long-term capital gains rate of 20 percent starting in 2013 would still be relatively modest. Even the likely worst-case scenario of 23.8 percent for high earners would hardly be dire in comparison with many recent years.
The maximum long-term capital gains rate was as high as 39.9 percent in the 1970s and 28 percent for a good chunk of the `80s and `90s.
3. ACCELERATE A SALE YOU ALREADY WERE PLANNING.
Assuming the price is right, go ahead and sell this year if you were going to do so soon anyway. That's particularly the case with property or real estate, where the rate increase for capital gains is slightly different but the same principle applies.
Kahler is telling clients they should consider moving up any sale that they were expecting to make in the next 12 to 24 months. PwC, the U.S. arm of professional services company PricewaterhouseCoopers, goes even further, recommending selling any asset now that you might otherwise in the next 10 years.
It's OK to hold off until after November elections to see if
Just be wary of waiting until the last few days of the year or you could get stuck selling at a market low. Investment guru
4. WATCH YOUR BRACKET.
Carefully consider the consequences of any sale on your adjusted gross income.
Selling a substantial amount of assets could drive you into a higher tax bracket than you would have been otherwise, and this would skew your math on tax savings. And you don't want to trigger the additional 3.8 percent surplus tax on a big chunk of investment income.
5. PRESERVE YOUR CAPITAL LOSSES.
Don't rush to sell if you have capital tax losses carried over from earlier sales.
The technique known as tax-loss harvesting is generally a savvy way to reduce your tax burden. If you have sold shares of a stock or mutual fund for less than you paid, that created a capital loss for tax purposes. It can be used to offset a capital gain that you incurred by selling another stock or fund.
Taxpayers who have more losses than gains can carry them over to subsequent years indefinitely and apply as much as
But using the tax losses this year wouldn't go as far as they would in 2013 and beyond when you'd likely have more capital gains taxes to offset. So, no need to sell shares now just to have a gain to offset in 2012. Better to hang onto those losses and use them in later years, advises Jeff Saccacio, partner in PwC's private company services practice.
Personal Finance Writer
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