Make us your home page
Instagram

Today’s top headlines delivered to you daily.

(View our Privacy Policy)

Hasty decisions may cost more than higher taxes

With all the ominous talk of tax increases and a "fiscal cliff" if President Obama and congressional leaders can't agree on a plan to avert automatic tax increases on Dec. 31, some investors may be tempted to act soon to take advantage of the current tax rates.

But financial advisers say that in their rush to doing something this year, investors may end up with regrets.

The taxes the wealthy worry most about are an increase in the capital gains rate to 20 percent from 15 percent, which would affect investments like stocks and second homes; an increase in the 15 percent tax on dividends; and a limitation on deductions, which would effectively increase the tax bill.

In addition, the health care law sets a 3.8 percent Medicare tax on investment income for individuals with more than $200,000 in annual income (and couples with more than $250,000).

Here is a look at some areas where decisions based solely on taxes could be ill advised.

Appreciated stock: Many people have large holdings in a single stock, often the result of working for a company for many years. And the stock may have appreciated significantly over that time. But if they are selling now solely for tax reasons, advisers say they shouldn't. The stock may continue to do well and more than compensate for increased capital gains.

But there is an upside to an increase in the capital gains rate: wealthier clients may finally be pushed to diversify their holdings.

Still, selling stock now may make sense when it is in the form of stock options set to expire early next year.

MUNICIPAL BONDS: Bonds sold to finance state and local government projects are tax-free now and will be tax-free next year. But advisers fear that individuals just above the $200,000 threshold will try to offset a tax increase by moving more of their investments into municipal bonds.

Beth Gamel, a certified public accountant, imagined a case where people in higher tax brackets, thinking they were acting rationally, sold stocks this year to take advantage of the lower capital gains rates and then, to avoid higher taxes next year, put all or some of that money into municipal bonds. Maybe they outsmart the tax man, but they do so at risk to their retirement.

"It will be very difficult for them to reach their long-term goals," she said, "because the yield on muni bonds is lower than stocks over time."

REAL ESTATE: Advisers are concerned that people will consider selling their home for fear that the appreciation on it will be more heavily taxed next year. Melissa Labant of the American Institute of Certified Public Accountants said that most home sales are never taxed because the first $500,000 of appreciation was exempt for a couple. Even if you are subject to capital gains tax, it is only on the amount above the exemption level.

INSURANCE TRICKS:Annuities are another area where people might rush in to avoid taxes. As with any insurance product, annuities get preferential tax treatment.

"I'm concerned that aggressive insurance people are going to see this as a time to sell annuities," Gamel said. "Annuities are among the most complex investment products there are. If we only have between now and Dec. 31, we don't have enough time to assess them."

SIMPLER SOLUTIONS:Andrew Ahrens, of Ahrens Investment Partners said he was telling clients that whatever happened next year could be reversed in two years with the next Congress, or in four with the next president.

Investors have an easier option. They can move assets that are likely to be taxed at a higher rate into retirement accounts and defer the tax, and put assets they don't plan to sell into taxable accounts.

Hasty decisions may cost more than higher taxes 12/02/12 [Last modified: Sunday, December 2, 2012 3:30am]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, New York Times.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Jordan Spieth wins British Open (w/ video)

    Golf

    SOUTHPORT, England — Someday, perhaps soon, there will be a plaque at Royal Birkdale for Jordan Spieth, much like the one off the 16th hole that celebrates Arnold Palmer and the 6-iron he slashed out of the rough in 1961 to win the British Open and usher in a new era of golf.

    Matt Kuchar plays out of the bunker on the 18th hole and finishes with bogey for 1-under 69. He had a one-shot lead after 13 holes.
  2. Fennelly: Brutal weekend could be start of something worse for Rays

    The Heater

    ST. PETERSBURG — Well, that was lovely.

    Brad Boxberger suffers his second loss in the three-game series, this time by allowing back-to-back homers in the eighth inning when called on to protect a 5-3 lead. “Just bad pitches,” he says.
  3. Wesley Chapel hockey camp impresses youth players, parents

    Lightning Strikes

    WESLEY CHAPEL — As a 17-year-old Triple-A hockey player, MacCallum Brown regularly plays against elite talent. As a Palm Harbor resident, he often has to travel to face that talent.

  4. Rays claim not to be panicking after third straight brutal loss to Rangers (w/ video)

    The Heater

    ST. PETERSBURG — There was no "here we go again" moment in the dugout as Rougned Odor's two-run homer in the eighth inning arced across Tropicana Field and toward the rightfield seats, even though when it landed, the score was tied and another late-inning Rays lead was blown.

    Rays third baseman Evan Longoria heads back to the dugout after fouling out in the ninth inning with the potential tying run on first.
  5. White House signals acceptance of Russia sanctions bill

    National

    WASHINGTON — The White House indicated Sunday that President Donald Trump would accept new legislation imposing sanctions on Russia and curtailing his authority to lift them on his own, a striking turnaround after a broad revolt in Congress by lawmakers of both parties who distrusted his friendly approach to …

    President Donald Trump’s ability to lift sanctions against Russia would be blocked.