Make the Tax Man Wait

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December 3, 2012

 

Do you think the tax rate on long-term gains will increase dramatically? If so, by how much? These are two questions most people with investments want to know now.

 

With most investment news outlets reporting that the top tax rate on long term gains will jump from 15% to 23.8%, many investors are scrambling to sell their winning stocks to pay a lower tax rate now. 

 

However, is this the smartest investment decision for the long term?

 

Below are the three variables to take into consideration before selling:

 

  • How long do you plan on holding the investment?
  • What rate of return do you expect to earn?
  • How much will the capital gains tax rate go up?

PARTNERSINWEALTH'S investment philosophy is not to take the short-term view but to take advantage of long-term growth.

 

For example, Matt and Josh have been friends since college, but they have always had different outlooks on investing. Matt is the short-term investor; while Josh is the keen long-term investor.  In November 2011, both invested $100,000 in the same stock and over the course of the year, it increased to $200,000.

 

After the 2012 election, Matt was so adamant that the tax rate was going to increase dramatically that he sold all his shares. He then reinvested the proceeds in the same stock. He realized the $100,000 capital gain and paid at the 15% tax rate, leaving him with $185,000 invested in the stock. Josh took no action which kept the $200,000 invested.  

 

Fast forward to 2027, their investments had grown over the last ten years at an 8% growth rate. Both Matt and Josh decided to sell their investment. Their realized capital gain was taxed at the 23.8% rate. Despite the higher capital gains tax, Josh was able to generate over $16,000 more in net proceeds than Matt.

 

Essentially, Matt gave his money to Uncle Sam sooner rather than later.  He left less money in his portfolio to grow for himself.

 

The Wall Street Journal recently did a brief but interesting article on the capital-gains tax rate. You can read it by clicking here.

 

If you would like to learn more about PARTNERSINWEALTH'S position on this topic, please contact your PERSONALCFO or Jim Waters at 713.964.4028 or jrw@partnersinwealth.com