Are you thinking about bailing out of stocks before
year-end while the capital gains rate is low? Before
you hit the sell button, think it over carefully. For now,
the long-term capital gains tax rate is 0%, 15% or
20% depending on your taxable income and filing
status. Next year, those rates could rise.
Current L-T cap gains tax rate
L-T Cap Gains
$0 to $40,000
$40,001 to $441,450
$441,451 or more
Yes, it is possible that some upper-income taxpayers
will pay a higher tax rate on long-term capital gains
starting next year. This will no doubt be negotiated
further as our political leaders wrestle in Washington.
At this point, we also really don’t know whether taxes
will rise, or by how much. There is a lot of publicity
about this, but only time will tell.
As such, some investors are thinking about selling
now to lock in the 15% rate and then buying back the
same securities if they think they will rise further.
There might be some merit to that strategy, but don’t
move too fast.
Remember the alternative minimum tax
One potential drawback is the alternative minimum
tax (AMT). If you are subject to AMT, the 15% capital
gains rate could effectively become 26% or 28%,
because of how the AMT is currently calculated.
Those who are subject to AMT typically have
relatively high incomes. And essentially they calculate
their income tax twice — under regular tax rules and
under the stricter AMT rules — and then pay the
higher amount owed.
Here is one way to look at it: the AMT runs along the
same lines as our standard tax system, but it has a
different tax rate structure and eliminates some
common tax breaks. And while there are seven
federal income tax brackets (for now) ranging from
10% to 37%, the AMT has two tax brackets: 26% and
AMT exemption amounts for 2021
Married, filing jointly
Income at which exemption begins to phase out
It would be a shame to sell now to lock in a 15% tax
rate when actually you’d end up paying more than if
you waited. Will you be subject to the AMT next
year? Tough to say, because Congress could change
the rules and subject millions of more taxpayers to the
AMT next year.
But with all of that being said, you should not base
investment decisions solely on taxes. What matters is
how much profit you get to keep after taxes and how
well your portfolio is positioned and diversified. But
before rushing to lock in a 15% rate, be sure to
consider all of the variables.
Sit down and talk with your advisor before making any
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