Don't worry about a hike in the capital gains tax
As we approach the dreaded fiscal cliff, many financial pundits are sounding the alarm: “Take your capital gains now to avoid higher taxes next year!”
Should most of us be worried about this? On this week’s Money Matters, financial commentator Greg Heberlein says you should hang on to your winning investments. He tells KPLU’s Dave Meyer that the push to sell because of capital gains concerns may be the biggest idiocy since the sale of no-money-down, balloon-payment mortgages.
Here are some reasons why the advice to sell now should be shunned:
A Wall Street adage dictates what many avoid – cut your losses short, let your winners run. In other words, keep your best stocks.
Investment oracles cry out that you want to sell those winners because 39 percent or higher income taxes on capital gains are imminent. Balderdash! There is a possibility no changes will occur. There is also a possibility that any changes may be phased in over several years.
Why dump something you continue to like? Why would anyone sell winners solely because the cap gains tax might go higher? When you bought Apple or IBM or Microsoft or Berkshire Hathaway, did you plan to wait to sell until a new cap gains rate went into effect?
Fewer than one in five benefit from capital gains. More than half of dividend and cap-gains benefits go to the top one-tenth of one percent. The vast majority of middle-income families receive cap gains dividends only through individual or company retirement plans. Since most of those distributions will require taxation at regular rates when funds are withdrawn, today’s 15 percent rate is of no value anyway.
If you plan to pass stocks on to your heirs, selling now is nonsensical. If you hold the stock until you die, you’ve avoided capital gains entirely. When your heirs receive the stock, the cost basis is calculated when they receive it, not at the price you bought it.
Taxes don’t intrinsically affect the relative value of stocks. One should not buy or sell on tax considerations.
On the dividend side, what risk exists at all? If higher tax rates reduce your dividend, should you sell the stock and invest elsewhere? Where would that be? A dividend cut from 3 percent to 2.5 still exceeds most other savings rates, and your stock-appreciation potential remains the same.
However, if you have an asset – whether it’s a stock, or a vacation home, or a precious gem -- that has gone up significantly in value and you planned to sell it soon anyway, making the sale before Jan. 1 might be a good idea.
But for almost all middle-incomers, selling now to save pennies on a capital gain just doesn’t make any sense.