It's never too late to plan ahead, and a few tax policy changes looming in 2013 may make this more than just a December to remember.
First, let's introduce the concept of tax-gain selling.
You probably already know about tax-loss selling. Investors who have paper losses on positions held in taxable accounts often sell those losers in December to write them off in that filing year's return. Sure, there's a $3,000 limit on the amount that losses can be used in excess of capital gains in any given year (and half as much for married tax payers filing separately), but unused losses do carry over to subsequent years.
Tax-loss selling in December typically leads to the January effect as last year's largely small-cap losers rally with investors buying back into the names sold off the month before.
Now let's reverse that. What if winners are the names being sold in December?
What could cause that to possibly happen? Well, as of right now, the Bush tax cuts are set to expire by the end of this year. Unless the cuts are extended, capital gains will revert back to being taxed at the higher pre-2003 levels. In other words, if someone is sitting on meaty paper profits, it may make sense to unload them in December if they were planning on selling sooner rather than later.
There's a real incentive to cash out this year. Folks may also hold off on selling their losers until the tax benefit, turning tax-loss selling into tax-gain selling in December. The January effect could very well become the January defect.
Dividend we fall
It's not just capital gains likely bumping up against higher rates come 2013. The Wall Street Journal's Jack Hough points out how Uncle Sam's bite on dividends may also get bigger.
A lot bigger.
Instead of the 15% rate that all taxpayers have been enjoying since 2003, investors in the highest tax bracket are looking at a 43.4% rate. This is the combination of the maximum income-tax rate of 39.6% and a 3.8% tax on investment income that is part of the 2009 health-care overhaul.
Now, a lot can happen between now and then. The Supreme Court is debating the constitutionality of health-care reform law this week. Regardless of who wins in November, both political parties may think twice about a move that would nearly triple the rate on dividend income. The 15% rate is probably gone forever, but there may be some compromises between 15% and 43.4% for the largest taxpayers.
Why are you reading this in March? Well, as more investors begin looking ahead to see what's waiting at the other end of this year, there will be moves to be made. Winners may sell off in December. Folks may move high-yielding stocks to tax-protected -- or tax-deferred -- retirement plans.
It's never too early to be ready for what tomorrow brings.
Tax-gain selling? Spread the word.
The sun will come out – tomorrow
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