It's never too late to plan ahead, and a few tax policy changes
looming in 2013 may make this more than just a December to
First, let's introduce the concept of tax-gain selling.
You probably already know about
. Investors who have paper losses on positions held in taxable
accounts often sell those losers in December to write them off in
that filing year's return. Sure, there's a $3,000 limit on the
amount that losses can be used in excess of capital gains in any
given year (and half as much for married tax payers filing
separately), but unused losses do carry over to subsequent
Tax-loss selling in December typically leads to
the January effect
as last year's largely small-cap losers rally with investors buying
back into the names sold off the month before.
Now let's reverse that. What if winners are the names being sold
What could cause that to possibly happen? Well, as of right now,
the Bush tax cuts are set to expire by the end of this year. Unless
the cuts are extended, capital gains will revert back to being
taxed at the higher pre-2003 levels. In other words, if someone is
sitting on meaty paper profits, it may make sense to unload them in
December if they were planning on selling sooner rather than
There's a real incentive to cash out this year. Folks may also
hold off on selling their losers until the tax benefit, turning
tax-loss selling into tax-gain selling in December. The January
effect could very well become the January defect.
Dividend we fall
It's not just capital gains likely bumping up against higher rates
The Wall Street Journal
's Jack Hough points out how Uncle Sam's bite on dividends may also
A lot bigger.
Instead of the 15% rate that all taxpayers have been enjoying
since 2003, investors in the highest tax bracket are looking at a
43.4% rate. This is the combination of the maximum income-tax rate
of 39.6% and a 3.8% tax on investment income that is part of the
2009 health-care overhaul.
Now, a lot can happen between now and then. The Supreme Court is
debating the constitutionality of health-care reform law this week.
Regardless of who wins in November, both political parties may
think twice about a move that would nearly triple the rate on
dividend income. The 15% rate is probably gone forever, but there
may be some compromises between 15% and 43.4% for the largest
Why are you reading this in March? Well, as more investors begin
looking ahead to see what's waiting at the other end of this year,
there will be moves to be made. Winners may sell off in December.
Folks may move high-yielding stocks to tax-protected -- or
tax-deferred -- retirement plans.
It's never too early to be ready for what tomorrow brings.
Tax-gain selling? Spread the word.
The sun will come out - tomorrow
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