Rockbridge Named #81 on CNBC's Top 100 Fee Only Wealth Mgmt Firms List
Dec 18

The Fiscal Cliff: Why Selling Now Is Not Always The Best Strategy

by

The daily fiscal cliff news coverage is causing irrational investor behavior regarding unrealized long-term capital gains (LTCG).  Without congressional action the LTCG rate is set to increase from 15% in 2012 to 20% in 2013.  In addition, high earners are subject to a 3.8% Medicare surtax applied to all capital gains. (income greater than $250,000 for married filing jointly, $200,000 for singles, $125,000 for married filing separately).  The proposed tax rate changes are far from certain and may not be resolved well into 2013.

In order to accurately determine if a year-end sale is the right decision, the pros and cons must be weighed against each other.

Reasons to sell appreciated assets by year end

What are you giving up?

Payback Period
The year end tax planning decision is purely a factor of when the assets will be needed.  An example is the best way to look at the situation.  If an investor has a $100,000 LTCG and sells them in 2012, that investor will have a federal income tax bill of $15,000, excluding AMT implications.  If that investor were to buy back the stock, they could only use the remaining $85,000.  Over time the $5,000 tax savings (between a 15% and 20% LTCG rate) would be offset by the compounding interest realized by the $100,000 investment over the $85,000 investment. With average real market returns of 6%, the payback of holding LTCG is less than 6 years.

The table below depicts the required number of YEARS that LTCG must be held to come out ahead of the potential tax changes in 2013:

New LTCG Tax Rate

Real Growth Rate (Excluding Dividends)

2%

4%

6%

8%

10%

20%

17.5 yrs

8.9 yrs

5.9 yrs

4.4 yrs

3.5 yrs

23.8% (20% + 3.8%)*

27.4 yrs

14.5 yrs

9.8 yrs

7.3 yrs

5.8 yrs

*This rate applies to high income earners

The long term capital tax rates remain uncertain.  Making portfolio decisions based upon a potential tax law change is a mistake for both clients and advisors.  While each situation is unique, there is no compelling reason that realizing capital gains now is a better decision than doing nothing.

You Might Also Like

Other articles filed under Investing

What to Ask Your Financial Advisor

September 20, 2018
How does/and how much does your advisor get paid? Fees matter.  It is important to know how much you are paying and the value you receive for that payment.  If you're paying 1% or more for only investment management with no...
Continue Reading

The 5-year Countdown to Retirement

August 16, 2018
While you should think about retirement planning as early as possible, the five years leading up to retirement are critical. If you believe you are 5 years or less away from retirement, now is the time to seriously take a...
Continue Reading

How to Prepare for a Market Correction

August 6, 2018
It’s simple. Don’t. A common question we receive is “how do I prepare for the inevitable stock correction?”  There are two answers to this question: the one you want to hear (which is wrong), and the one you don’t want...
Continue Reading

Market Commentary – July 2018

July 24, 2018
Stock Markets Returns from various stock market indices over several periods ending June 30, 2018 are shown to the right.  Here are a few highlights: Domestic stocks continue to lead the way. REITs were up nicely for the quarter, but...
Continue Reading

The Least Prepared in Decades

July 18, 2018
A recent headline in the Wall Street Journal declared, “A Generation of Americans Is Entering Old Age the Least Prepared in Decades.”  The article starts out by stating, “Americans are reaching retirement age in worse financial shape than the prior...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter