The long political campaign is over. Endless hours of debates and political ads ended with not much change in Washington, D.C. Barack Obama is still president, Democrats still control the Senate and Republicans still control the House.
Throughout the campaign, one sticking point came up again and again — taxes.
Now that the election is settled, do we know how our tax laws will look next year?
“Nobody knows what will happen,” said Conrad Seales, a certified public accountant with Meisser & Seales in Santa Cruz, “except that taxes will not go lower anytime soon.”
But they might go higher. Several tax cuts enacted under President George W. Bush are scheduled to expire at year’s end.
If the president and Congress can’t come up with a budget, the country will be pushed over what has come to be known as the “fiscal cliff.” A bunch of tax hikes and spending cuts would go into effect at the beginning of next year.
Households would see an average increase of $3,500 in their tax bills, according to an analysis by the Tax Policy Center, a nonpartisan think tank in Washington. The increases would vary according to income, but 90 percent of all households would pay more.
Among the changes would be a jump in the top rate on long-term capital gains, from 15 percent to 20 percent.
Some financial advisers are telling clients to sell stocks and other assets that have gone up in value before the end of the year to lock in low tax rates on capital gains.
For example, let’s say you bought 1,000 shares of Seagate Technologies in the summer of 2009, when it was about $10 a share. That’s an investment of $10,000.
Now Seagate is close to $30 a share. If you sold your 1,000 shares at $30 a share, you would have a long-term capital gain of $20,000.
Under present tax law, your federal tax bill on that gain would be 15 percent of the $20,000 profit — $3,000.
But if the Bush tax cuts expire Dec. 31 and you sell your Seagate shares in 2013 for $30 a share, your $20,000 capital gain would be taxed at 20 percent instead of 15 percent.
Plus, if you are an upper-income household, you’ll get hit with another tax. A single taxpayer with an income of more than $200,000 or a couple earning more than $250,000 will pay the new 3.8 percent Medicare tax on unearned income.
So the federal tax you’d pay on the Seagate capital gain would be 23.8 percent of $20,000 — $4,760 — in 2013, instead of the $3,000 you’d pay in 2012.
Does that mean you should sell your Seagate shares now?
Not necessarily, according to Seales.
“People should consider the economic sense of a proposed transaction before they consider the tax consequences,” he said.
If you believe Seagate shares will go higher, you should hold onto them. If you believe the shares are overvalued, then you might want to sell.
“It doesn't make sense to sell now at an unfavorable price in order to avoid hypothetical future taxes,” Seales said. “But if you think your selling price now is favorable, then selling in 2012 makes sense.”
I agree. Taxes are a consideration, but they should not drive investment decisions.
Anyway, the 2013 tax rates cited in this example might not apply if our leaders in Washington can prevent us from falling over the fiscal cliff. We’ll know more in a few weeks.
- Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or email@example.com.