Cash in while LTCG rates are at historic lows?


R

Rich Carreiro

So, what are you advisors telling clients with significant unrealized
long-term capital gains? Are you telling them to sit tight no matter
what, or have you thought about recommending they realize some/all of
those gains soon (perhaps this year) while the LTCG tax rate sits at
15%.

Leaving aside the wisdom of rate changes (since that's not a suitable
discussion for this forum), if Obama (or, ghod forbid, Edwards) gets
elected this November, seeing significant increases in LTCG tax rates
is a distinct possibility in 2009 and a near-certainty by 2011 (when
the current rates sunset absent extension).

True, the concept of tax deferral is very important, but how much is
that overridden by a 15% rate now, vs. a 28% (or perhaps even higher)
rate in potentially the not-too-distant future?
 
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J

joetaxpayer

Rich said:
So, what are you advisors telling clients with significant unrealized
long-term capital gains? Are you telling them to sit tight no matter
what, or have you thought about recommending they realize some/all of
those gains soon (perhaps this year) while the LTCG tax rate sits at
15%.
Rich, I can't find the details, but I recall a provision that allowed
one to claim the gain as if a stock was sold 12/31 and raise the cost
basis to the claimed 'sale' price. i.e. They'd take advantage of the
LTCG without having to actually sell and buy the stock back. Anyone else
recall this option?

JOE
 
J

jIM

).
True, the concept of tax deferral is very important, but how much is
that overridden by a 15% rate now, vs. a 28% (or perhaps even higher)
rate in potentially the not-too-distant future?

--
I am not a professional, and most of my investments are tax defferred.

My thought would be

a) you need another investment when "cashing in" (if you need money of
course cash out)
b) assuming you have another investment, cash in some of it because
the reinvestment in 60 days into something similar is being made at a
relative low point (assuming market movement in next 60 days is not a
huge Bull market run- no way to know for sure)
c) a doubling of tax rates should get some financial planning
attention
 
R

Rich Carreiro

Rich Carreiro said:
So, what are you advisors telling clients with significant unrealized
long-term capital gains? Are you telling them to sit tight no matter
what, or have you thought about recommending they realize some/all of
those gains soon (perhaps this year) while the LTCG tax rate sits at
15%.
Just to be clear, I'm not talking about cashing out and having
the money sit in cash (or whatever). I'm talking about selling
the investment for the sole purpose of realizing the gain during
a low-tax regime and then repurchasing it immediately. In other
words, I'm talking about (in essence) stepping up the basis of
existing investments to current FMV at the cost of 15% of the
gain, as a hedge against significantly higher rates in the future.
 
R

Rich Carreiro

joetaxpayer said:
Rich, I can't find the details, but I recall a provision that allowed
one to claim the gain as if a stock was sold 12/31 and raise the cost
basis to the claimed 'sale' price. i.e. They'd take advantage of the
LTCG without having to actually sell and buy the stock back. Anyone
else recall this option?
That was a one-time deal back in 1998. Can't do it now.
Or rather, to do it you actually have to sell and repurchase
the investment (and no, there's no "wash sale" rule for things
sold at a gain).
 
P

PeterL

Just to be clear, I'm not talking about cashing out and having
the money sit in cash (or whatever).  I'm talking about selling
the investment for the sole purpose of realizing the gain during
a low-tax regime and then repurchasing it immediately.  In other
words, I'm talking about (in essence) stepping up the basis of
existing investments to current FMV at the cost of 15% of the
gain, as a hedge against significantly higher rates in the future.

How do you evaluate the probability of a higher LTCG tax rate in the
near future?
 
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H

HW \Skip\ Weldon

So, what are you advisors telling clients with significant unrealized
long-term capital gains? Are you telling them to sit tight no matter
what, or have you thought about recommending they realize some/all of
those gains soon (perhaps this year) while the LTCG tax rate sits at
15%.
Before the stock market fell out of bed (it has its own way of
rebalancing), I was cautioning clients who planned to sell in the next
few years anyway about the chances of a LTCG tax hike - or an AMT
change which effectively does the same thing.

Right now it's a dicey call, and I remind clients of how Congress
frequently changes taxes. But I also remind them that every bear
market/recession has ended, and wonder about the wisdom of selling
now. In the end I am more sure about market rebounds than I am tax
changes.


-HW "Skip" Weldon
Columbia, SC
 
A

Amy W.

HW said:
Right now it's a dicey call, and I remind clients of how Congress
frequently changes taxes. But I also remind them that every bear
market/recession has ended, and wonder about the wisdom of selling
now. In the end I am more sure about market rebounds than I am tax
changes.
we concur (firm) and have actually taken a small internal bet on markets starting a
climb within 48 hours either side of 03/28/08

Amy W. CFP, CPA
 
J

joetaxpayer

PeterL said:
How do you evaluate the probability of a higher LTCG tax rate in the
near future?
Depending on the size of one's position and the ammount of gain
contained within, the cost to sell/buy may be minimal compared to the
delta to any new cap gain rates.
JOE
 
P

PeterL

Depending on the size of one's position and the ammount of gain
contained within, the cost to sell/buy may be minimal compared to the
delta to any new cap gain rates.
JOE
Depends on the probability of change to the cap gain rates don't it?
In any event, unless they do a retroactive cap gain rate change,
there's plenty of the time to sell. I don't have position in any
holding that's so large that I cannot sell within minutes.
 
I

inky dink

Rich Carreiro said:
So, what are you advisors telling clients with significant unrealized
long-term capital gains? Are you telling them to sit tight no matter
what, or have you thought about recommending they realize some/all of
those gains soon (perhaps this year) while the LTCG tax rate sits at
15%.

Leaving aside the wisdom of rate changes (since that's not a suitable
discussion for this forum), if Obama (or, ghod forbid, Edwards) gets
elected this November, seeing significant increases in LTCG tax rates
is a distinct possibility in 2009 and a near-certainty by 2011 (when
the current rates sunset absent extension).

True, the concept of tax deferral is very important, but how much is
that overridden by a 15% rate now, vs. a 28% (or perhaps even higher)
rate in potentially the not-too-distant future?

not wanting to play with equations late last night, ran a quick spreadsheet
making various assumptions as to built in gains, growth rates, and of course
a new tax rate. I added on 9 or 10 percent for California taxes. With a
tax rate rising from 25% to 38% (combined), it takes a number of years for
the compounding effect of the postponed taxes remaining in your portfolio to
outstrip the higher taxes when ultimately sold. The amount of the
unrealized built in gain seemed to have little effect on the outcome, while
assumed gain rates had some effect.

the higher the tax increase, the longer the breakeven point.
the higher the gain rate, the shorter the breakeven point

actually, under this scenario:

gain rate breakeven
5% 11 yrs
6% 10 yrs
7% 9 yrs
8% 7 yrs
9% 7 yrs
10% 6 yrs


of course, you can consider other possibilities:

1. taxes revert lower again some time in the future.
2. you die, passing on your portfolio to your heirs or beneficiaries with a
stepped up basis (unless that part of the tax law changes too), thus
avoiding capital gain tax all together.


any other thoughts???
 
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R

rick++

I think the tax implication is secondary to whether the
financial instrument is the best place to invest your money.
One of the better things Suze Orman asks "would you buy
the same investment this very day if you had the same
amount of cash? If no, you should sell some, or all of it."
This is easier done inside a no-tax account like retirement,
but applies to taxbles too.
 
G

Gil Faver

rick++ said:
I think the tax implication is secondary to whether the
financial instrument is the best place to invest your money.
One of the better things Suze Orman asks "would you buy
the same investment this very day if you had the same
amount of cash? If no, you should sell some, or all of it."
This is easier done inside a no-tax account like retirement,
but applies to taxbles too.
True, but assuming you would keep the investment, is it prudent to sell to
obtain a higher basis if an increase in the LTCG rate is imminent?

One thing to consider is the loss of tax revenue and the tightening up of
real estate activity with a higher LTCG rate, and the pressure to reduce it
again. In that scenario, if you can ride out the interim increase in LTCG
rates, no need to sell for a higher basis.
 
T

TB

Rich said:
So, what are you advisors telling clients with significant unrealized
long-term capital gains? Are you telling them to sit tight no matter
what, or have you thought about recommending they realize some/all of
those gains soon (perhaps this year) while the LTCG tax rate sits at
15%.
Rich, an easy one is with the many retirees who expect to have less than
$65,100 in taxable income during 2008 (excluding capital gains). This
year, and through 2010, capital gains in the 15% and 10% brackets are
taxed at 0%. You can imagine scenarios where it pays to do sales &
repurchases each year just to realize enough gains to fill up the 15%
bracket. There's still state tax and taxation of Social Security to
consider, but 0% is hard to pass up.

-Tad
 
D

Douglas Johnson

In any event, unless they do a retroactive cap gain rate change,
there's plenty of the time to sell. I don't have position in any
holding that's so large that I cannot sell within minutes.
To the best of my memory, cap gains increases have always been retroactive to
some extent. They want to prevent rush sales like you suggest. Think what it
would do to the market otherwise.

-- Doug
 
R

Rich Carreiro

Douglas Johnson said:
To the best of my memory, cap gains increases have always been retroactive to
some extent. They want to prevent rush sales like you suggest. Think what it
would do to the market otherwise.
Isn't one of the standard things to make the effective date of
the increase be the date that the bill was first introduced (or
the date that the Congresscritters made it clear the bill was
going to be introduced)? The idea being that people have been
put on notice as of that date that a tax increase is in the cards.
 
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B

beliavsky

Isn't one of the standard things to make the effective date of
the increase be the date that the bill was first introduced (or
the date that the Congresscritters made it clear the bill was
going to be introduced)?  The idea being that people have been
put on notice as of that date that a tax increase is in the cards.
Things should become clearer after the elections in November of this
year. Can't I assume that the next President and Congress are not
going to tinker with the laws of the 2008 tax year?
 
E

Elle

TB said:
Rich, an easy one is with the many retirees who expect to
have less than
$65,100 in taxable income during 2008 (excluding capital
gains).
-- The dollar figure above is for Married Filing Jointly.

-- This general guidance applies to retirees and
non-retirees alike.

-- The taxable income amount above excludes long term
capital gains and qualified dividends. That is, qualified
dividends are also taxed at 0% for this income for MFJ.

-- Nitpick: It's $65,100 or less for MFJ.

-- For single people (and not head of household blah blah),
a taxable income of 32,550 or less (excluding LTCGs and
qualified dividends) will result in a tax rate of 0% on
LTCGs and qualified dividends.

See http://www.irs.gov/pub/irs-drop/rp-07-66.pdf , among
other citations.

As the regulars know, beware the 30-day wash sale rule as
you "step up your basis" tax free, income allowing per the
guidance above.

Many retirees have substantial income from qualified
dividends, so this could be a fantastic year (or few years)
for low taxes for them and taking those LTCGs.

For the less versed, taxable income of course refers to
income after deductions and exemptions, or line 43 on the
2008 Form 1040.

Richard, re your comment on candidate Edwards: Couldn't
resist putting in your own puny personal politics, eh? What
you say about candidate Obama is barely better.

Any paid advisor who does not discuss stepping up capital
gains per the above is remiss in his/her responsibilities,
AFAIC. The savings are not peanuts. As Joetaxpayer might
also remind us, another option to consider, maybe
especially for retirees with a lot of qualified dividends,
is converting some of one's Trad IRA to a Roth IRA.
 
D

Douglas Johnson

As the regulars know, beware the 30-day wash sale rule as
you "step up your basis" tax free, income allowing per the
guidance above.
I think wash sale rules only apply to losses, not gains.
-- Doug
 
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R

Rich Carreiro

Elle said:
As the regulars know, beware the 30-day wash sale rule as
you "step up your basis" tax free, income allowing per the
guidance above.
I sincerely hope the regulars do not "know" that, since if they did
"know" that, they might get in trouble for giving negligent advice.

Before offering more tax advice to "the regulars", you may wish to
avail yourself of the opportunity to review basic taxation of
investments. As an example, the wash sale rule only applies to sales
that realize losses, and there is no rule which allows (let alone
requires!) the deferral of gain when a realized gain occurs +/- 30
days of a purchase of the same security.
 

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