Balancing Act

While it is always a good idea to keep the proper asset allocation in your stock portfolio, there may be a good reason to trim those large concentrations and reallocate sooner rather than later.

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Currently, long-term capital gains (stocks that are held for one year) are taxed at 15%. However, that rate is due to increase to 20% in 2011. While that may sound like a huge increase there are many experts who think that a new president may pressure congress to raise the long-term capital gains tax even higher in light of increased pressure from the war and disaster relief efforts.

According to a Dow Jones Newswires article published October 26, 2007, no one is making a recommendation to sell appreciated stock only to save on the amount of tax you have to pay on long-term gains. However, if you are thinking about trimming a position or you are needing to sell in the near term anyway then better to take action before the rates increase.

Edmund T. Hyland, Global Investment Specialist at JP Morgan Private Bank had this to say:

“You should never let the tax tail wag the dog. But we think there is a window of opportunity with the rate at 15% to maybe be quicker to diversify than you might otherwise have been. We’re encouraging clients who have concentrated positions of low-basis stock to think about this.”

The article goes on to explain the current rate is the lowest it has been since WWII. Many experts are expecting rates to increase to somewhere between 20% and 30%.

Assuming the capital gains tax rate simply reverts to the rate prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003, then we will be faced with a long term tax rate of 20% for gains on equities held for more than one year. Gains on securities held for five years or more would be taxed at 18%

Rande Spiegelman, vice president of financial planning, Schwab Center for Financial Research, points out, “If you’re in it for the long term, then why sell to save 3% on cap gain taxes if you’re only going to just turn around and reinvest the money? On the other hand, if you need the money and were going to sell in the near term anyway, then why not save 3% or 5%?”

So while it may be difficult to predict the future, it is likely that your capital gains taxes will go up. Something to keep in mind if you are looking to sell off some or all of your holdings.

Read the full article published by Financial Advisor Magazine here