Since the Bush-era tax cuts were extended in the first week of the year, the focus has now shifted back to reforming tax policy. Recent developments suggest that capital gains taxes will actually rise in the not so distant future.
Capital gains tax policy
Lawmakers have now focused much of their attention on reforming tax policy. The Bush-era tax cuts are highly unlikely to be extended once again because in the past when there have been major changes to the code, the capital gains tax was also modified.
When will the capital gains tax rise again?
It won’t happen immediately or in 2014. We expect capital gains tax rates to rise by 2015/2016 or in two to three years. This is partly due to the fact that lawmakers will need through 2014 to reach an agreement on many of the key elements in the code. Then, there’s a time lag for when the actual policy will go into effect.
How much will capital gains taxes rise?
It all depends on lawmakers, but the latest data suggests that it will be similar to ordinary income tax rates. This will apply to the favorable taxes rates on qualified dividend income too. The Obama administration also happens to be a major proponent for raising capital gains taxes in excess of 28% for higher income earners.
Should you realize your capital gains over the next two years?
The tax savings on long-term capital gains could be at least 13% and 16.8% should you be subject to the new investment income surtax. Investors may want to sell their positions and lock-in the lower capital gains tax rates within two years and then buy back the same shares as if they never sold the position. Having said that, we’re still a couple of years away from higher capital gains tax. It’s best to wait to see what lawmakers decide.
Don’t forget about investment performance
Many investors can get so focused on the pending tax changes, that they lose sight of the current and expected performance of the investment. Investors need to factor in their future expectation of the stock’s performance over the next two years.
What’s the key takeaway?
You need to consider all of these factors in your decision: investment time horizon, investment performance, your financial plan and the capital gains tax rates.
More investment tax questions? Browse answers or ask investment tax questions online.
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