[January 2013 update following Fiscal Cliff Deal] With legislation now in place to avert the fiscal cliff many investors will be breathing a sigh of relief as the tax rates on capital gains, dividends on investments did not rise as much as expected. A lot of pundits were forecasting that rates on investment income could rise to top marginal tax rate levels (39.6 percent).
However under the fiscal cliff deal investment income will still be taxed at 15 percent. Higher income earners, those making more than $400,000 ($450,000 for couples), will however pay 20 percent. This does not include the 3.8 percent health care surtax which also applies to investment income for higher income earners.
[December 2012 update] If you are planning to invest or realize any capital gains next year get ready for higher taxes. Particularly if you are already in a higher income group. Here is a summary of the investment tax changes you will see come into affect next year as the Bush-era tax cuts expire.
- Currently, gains from the sale of assets held more than one year are taxed at a rate of 15% for investors in the 25% income tax bracket or higher, and 0% for investors in the 10% or 15% bracket. Those rates are set to revert to 20% and 10% respectively on January 1st 2013.
- A new 3.8% surtax will take effect in January. Passed in 2010 as part of the health-care act, the tax will apply to investment income for taxpayers with adjusted gross incomes of either $200,000 or more (if single) or $250,000 or more (if married), potentially pushing the top long-term capital-gains rate to 23.8%.
- Dividends and short term capital gains (<1 year holdings) would be taxed as ordinary income, with a maximum rate of 39.6%, or 43.4% if you include the new investment health-care surtax.
Among the questions to consider: Will you need to sell assets soon to raise cash or to diversify a concentrated stock position? How long have you held the assets? And how much are the assets likely to appreciate going forward?
Mr. Kapyrin, an accountant in Green Bay, Wis. projected the value of two $500,000 portfolios with equal amounts of unrealized capital gains: a “pay-now” portfolio, where the investor realizes all gains this year at a 15% rate, immediately reducing the portfolio’s value by the amount of the tax paid; and a “pay-later” portfolio, where the investor realizes no gains this year, keeping his original $500,000. Assuming capital appreciation of 6% per year and a future capital-gains rate of 23.8%, Mr. Kapyrin compared the portfolios’ after-tax ending balances every year for the next 15 years.
The result: The pay-now portfolio won out in the short term, but the pay-later portfolio resulted in higher ending values for all periods longer than 10 years. With a projected capital-gains rate of 20%, the pay-later portfolio pulled ahead after just six years.
So what does this mean for you?
If you do plan to sell assets this year, especially if they’re stocks that have run up in the past few years, Mr. Keebler offers one reason to do it sooner rather than later. “I’m going to tell clients who need the money to harvest those gains right now,” he says. Why? Because of the potential for a market sell-off later this year as investors cash in on gains made over the last 2 years. Most financial advisers are also advocating that investors should, at the very least, ready themselves to take action in the months ahead rather than a few days before year-end when panic selling fills the market.
Sources : WSJ