What Investors Should Do Now With the Pending Capital Gains Tax Increase

In case you didn’t realize it, in 2011 there is an impending increase in capital gains tax to 20% – presently it’s 15% (or 0% if you’re in the 10% or 15% brackets). It might make a great deal of sense to take your gains now… that is, unless the capital gains rate is extended with tax legislation before the end of the year.

If you happen to hold positions in mutual funds or stocks that will result in capital gains if sold, you might be able to avoid a significant amount of tax if you sell your position (or at least part of it) before the end of 2010.

For example, if you purchased a mutual fund several years ago for $1,000 and over time the value has grown to $2,000, if you sell it today you would have a capital gain of $1,000, which would be taxed at a rate of 15% (or 0% if you’re in the 10% or 15% brackets), for a total of $150 in tax.

If you waited until January to sell the fund, you’d still have a $1,000 capital gain, but it would be taxed at 20%, for an increase of $50 (or $200 if you’re in the 10% or 15% brackets).

I wouldn’t get too wound up and sell out during November – I’d wait to see what Congress has up its sleeve for the remainder of the year.  There’s always a chance that they’ll extend the capital gains rates into next year… not sure I’d count on it, but it’s a possibility.  I’d just plan for making the sale, maybe in the latter half of December.  You can always back out if things change.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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