Tag Archives: Financial planning

Most of us prefer to think about taxes only once per year. However, with significant changes coming in 2011, tax considerations of financial planning and investment management will be prominent for the remainder of 2010.

Taxes on income, capital gains and dividends are all set to increase on January 1, 2011. Why give it any attention now?  Making decisions now could help you save thousands in taxes and allow you to reposition your taxable investment accounts for the long term. Also, we expect that a lot of tax-related selling late in the year could depress markets. It may be better to act before December.

Three big changes will occur in the tax rates we pay on taxable investments:

1. Capital gains taxes on investments held for one year or more will increase from 15% to 20% of the gain. For example, tax on a $1,000 gain will rise from $150 to $200, a 33% increase. (Investors in the 15% tax bracket will have capital gains taxes rise from 0% to 10% in 2011).
2. In 2011, taxes on dividends in taxable accounts will increase from 15% to the taxpayer’s marginal tax rate (as high as 39.6%). This tax applies even if the dividend income is reinvested and not actually realized as a cash payout.
3. For high income earners (above $250,000 if married filing jointly), starting in 2013 an extra 3.8 percentage points of tax will be added to investment income (capital gains, dividends, etc.). This will bump the long-term capital gains rate to 23.8%.

We are informing our clients about these changes now so they can make smart decisions about how to proceed.  For many people, this is a good opportunity to reduce a concentrated position in a single stock that has built up a large gain. The proceeds from the sale can be used to diversify more broadly, reducing risk.

We often start our meetings by reviewing four reasons NOT to worry about capital gains taxes.

1. If you have carried over past investment losses to offset future gains, or you expect to sell current investments at a loss to offset gain
2. If you expect to make a charitable gift of the holding, you’ll owe no tax on the gain, neither will the charitable recipient
3. If you expect to hold the investment to your death, you heirs will receive a step up in cost basis to the date of death value, eliminating capital gains tax on the difference between original basis and the date of death value. In a quirk of tax code, this actually doesn’t apply in 2010, inherited assets carry over the basis from original owner to the heir. In 2011, we are scheduled to revert to previous basis step-up rules.
4. If the holding is one you are reasonably certain will continue to grow significantly and you don’t mind paying more tax on the gains. Of course, if you like the position as a long-term holding, you can sell it now at a lower tax rate and buy it back 31 days later, starting your cost basis over at the new purchase price.

If none of these reasons apply, then we take our clients through the decisions that they need to make about which holdings to sell.

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Because marginal income tax rates are also going up in some brackets, you should also consider whether or not to accelerate distributions from an IRA or other retirement plan in 2010.

There are many other changes coming that will make your tax scenario more difficult in 2011. In future blog posts, we will continue to highlight tax topics that impact your investments. For understanding of the broad tax impact on your personal situation, please consult your tax advisor.

And remember that, while tax considerations may be important, they shouldn’t be the primary driver of your investment decision making. Be sure that activity in your accounts is helping you work toward goals, not detrimental to them.

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