Too much concern regarding the avoidance of capital gains
A couple of weeks ago we addressed the issue regarding the “cat that sat on the hot stove” and how after this, regardless of the temperature of the burner that cat would avoid stoves all together.
Investors are similar in that, once burnt, they become very risk adverse, usually to their long-term detriment.
However, as the cause of the latest pain, the bear market that ended during the first quarter of 2009, fades, investors face new challenges.
As the bull market ages, currently standing at more than eight years, investors have inaccurately turned their attention from risk aversion to the avoidance of capital gains, sometimes at nearly any and all cost.
In fact, primarily due to the sales of securities in nonqualified accounts during calendar year 2016, they have received a tax return from their preparer indicating a balance due.
Given the age of this bull market, most investors do not have enough unrealized capital losses to offset any realized gains thus resulting in the situation outlined above.
To those investors overly concerned with payments of tax on the sales of securities in which they have a gain, we recommend that they consider the other potential outcome – no gain or perhaps even a loss.
As a matter of course, we generally recommend that investors hold onto a security only as long as they believe that there is a potential for price appreciation or if another more attractive investment opportunity presents itself.
Should this situation occur, the tax ramification of the sale should be taken into consideration but not be the deciding factor.
Rather than sell a security outright, experienced Investors may wish to use options to protect their profits or tight stop loss orders.
In order to help you limit the taxes you will pay on capital gains, we thought the following might be helpful.
First, bite that only up to $3,000 can be deducted from ordinary income as a realized capital loss.
The balance can be carried forward, indefinitely.
An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss.
Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are generally taxed at zero percent for those taxpayers with taxable income of $75,900 or less; at fifteen percent for those with taxable income between $75,900 and $470,700 and at 20% for those fortunate enough to have taxable incomes above $470,700.
Please note that these rates are for joint filers.
Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income.
For most taxpayers, the rate is between twentyfive and thirty-three percent for the Federal Government.
In both instances, for taxpayers in New York State, long-term and shortterm capital gains are taxed as ordinary income.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial adviser. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial adviser prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.