On Wednesday stocks hit an 18-month high. The Dow Jones Industrial Average is 70 percent above its March 2009 lows; the S&P 500 is up 79 percent. Investors can rejoice, or at least stop worrying quite so much about their disappearing retirement.
But, wait. Here's a wee bit of rain to sprinkle on that parade. Those great gains will cost you, and the longer you hold them the more they might cost. Capital gains tax rates are slated to rise after this year. In 2010, gains are taxed at 15 percent for most taxpayers and at - gasp! - zero for folks earning under $34,000 ($68,000 for couples.) Next year they'll move up to 10 percent for the lowest bracket and 20 percent for everyone else. And in 2013, provisions of the new health care reform bill would levy a new 3.8 percent Medicare tax on the capital gains of taxpayers earning over $200,000 ($250,000 for couples.)
So, the longer you hold those shares, the more of your profits you'll have to share with your old Uncle Sam. Think of it this way:
You can keep it in the family. If you are helping adult children or parents who are in the lowest brackets, you can give them some winning shares instead of cash. They can sell them and pay zero(!) in gains taxes.
You can use up your old losses. These big gains are following colossal losses, remember? Taxpayers who sold shares in 2008 and 2009 to capture tax losses may still be carrying significant amounts forward. You can only use $3,000 of them every year to offset ordinary income, but you can use those old losses to offset as many new gains as you can collect. So you can sell your winners, write off the gains against the losers, and avoid those taxes altogether.
You can re-buy the same stock if you want to. Tax rules that prohibit selling and immediately repurchasing shares of the same security don't apply when you're harvesting gains, only losses.
IRA investors needn't worry. If your shares are tucked into tax-deferred retirement accounts, none of this applies to you. You'll pay later, too. But that's another story.
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