Tax planning: Should you harvest gains now?

The election of a new president has investors anxious about taxes, said Kathleen Pender in the San Francisco Chronicle. “On the campaign trail, Barack Obama proposed more than a dozen tax changes that would affect individuals.” Some high earners may see tax increases. Many lower- and middle-class citizens should see decreases. But the investor class is keeping a particular eye on his proposal to increase the tax rate on long-term capital gains and qualified dividends to 20 percent from 15 percent for taxpayers with income exceeding $164,550 (or $200,300 for couples). Here’s the thing: “Most of the ideas were floated before credit markets froze and the economy faltered.” Many experts recommend delaying tax hikes until the economy is on the road to recovery.

“Common wisdom” suggests that now would be the time to sell stock winners—if you have any, said Amy Feldman in BusinessWeek. Taking profits now would shield against any coming increase in capital gains rates. Before you sell, weigh the potential tax savings against the transaction cost, not to mention the financial burden of paying taxes now. Consider this example: If you have $10,000 in Apple shares with a cost basis of $7,000, you’ll pay $450 in taxes if you sell at the current 15 percent rate. If the tax rate were 20 percent, you’d pay $600. Is that extra $150 more than your transaction costs would be? A related dilemma is where to put that money. “It would take two years in something that offered an additional two percentage points in return annually to recoup the tax paid in the example above.”

But let’s not kid ourselves, said Brett Arends in The Wall Street Journal. Higher-income households “better start preparing for the likelihood of higher tax rates in the years ahead.” Fortunately, there are “plenty of things you can do to cushion the blow.” Bump up your 401(k) contributions to the $15,500 limit (or $20,000 if you’re over 50). “That money gets you a double whammy” of before-tax contributions and tax-deferred growth. “If your employer pays into the plan as well, it’s a triple whammy.” Municipal bonds are also a good bet. Not only are they on sale right now, they pay income that is “almost always free of federal tax.”

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