Cash in while LTCG rates are at historic lows?

Rich, I can't find the details, but I recall a provision that allowed one to claim the gain as if a stock was sold 12/31 and raise the cost basis to the claimed 'sale' price. i.e. They'd take advantage of the LTCG without having to actually sell and buy the stock back. Anyone else recall this option?

JOE

).

I am not a professional, and most of my investments are tax defferred.

My thought would be

a) you need another investment when "cashing in" (if you need money of course cash out) b) assuming you have another investment, cash in some of it because the reinvestment in 60 days into something similar is being made at a relative low point (assuming market movement in next 60 days is not a huge Bull market run- no way to know for sure) c) a doubling of tax rates should get some financial planning attention

Just to be clear, I'm not talking about cashing out and having the money sit in cash (or whatever). I'm talking about selling the investment for the sole purpose of realizing the gain during a low-tax regime and then repurchasing it immediately. In other words, I'm talking about (in essence) stepping up the basis of existing investments to current FMV at the cost of 15% of the gain, as a hedge against significantly higher rates in the future.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

That was a one-time deal back in 1998. Can't do it now. Or rather, to do it you actually have to sell and repurchase the investment (and no, there's no "wash sale" rule for things sold at a gain).

-- Rich Carreiro snipped-for-privacy@rlcarr.com

How do you evaluate the probability of a higher LTCG tax rate in the near future?

Before the stock market fell out of bed (it has its own way of rebalancing), I was cautioning clients who planned to sell in the next few years anyway about the chances of a LTCG tax hike - or an AMT change which effectively does the same thing.

Right now it's a dicey call, and I remind clients of how Congress frequently changes taxes. But I also remind them that every bear market/recession has ended, and wonder about the wisdom of selling now. In the end I am more sure about market rebounds than I am tax changes.

-HW "Skip" Weldon Columbia, SC

we concur (firm) and have actually taken a small internal bet on markets starting a climb within 48 hours either side of 03/28/08

Amy W. CFP, CPA

Depending on the size of one's position and the ammount of gain contained within, the cost to sell/buy may be minimal compared to the delta to any new cap gain rates. JOE

Depends on the probability of change to the cap gain rates don't it? In any event, unless they do a retroactive cap gain rate change, there's plenty of the time to sell. I don't have position in any holding that's so large that I cannot sell within minutes.

not wanting to play with equations late last night, ran a quick spreadsheet making various assumptions as to built in gains, growth rates, and of course a new tax rate. I added on 9 or 10 percent for California taxes. With a tax rate rising from 25% to 38% (combined), it takes a number of years for the compounding effect of the postponed taxes remaining in your portfolio to outstrip the higher taxes when ultimately sold. The amount of the unrealized built in gain seemed to have little effect on the outcome, while assumed gain rates had some effect.

the higher the tax increase, the longer the breakeven point. the higher the gain rate, the shorter the breakeven point

actually, under this scenario:

gain rate breakeven

of course, you can consider other possibilities:

1. taxes revert lower again some time in the future.
2. you die, passing on your portfolio to your heirs or beneficiaries with a stepped up basis (unless that part of the tax law changes too), thus avoiding capital gain tax all together.

any other thoughts???

I think the tax implication is secondary to whether the financial instrument is the best place to invest your money. One of the better things Suze Orman asks "would you buy the same investment this very day if you had the same amount of cash? If no, you should sell some, or all of it." This is easier done inside a no-tax account like retirement, but applies to taxbles too.

True, but assuming you would keep the investment, is it prudent to sell to obtain a higher basis if an increase in the LTCG rate is imminent?

One thing to consider is the loss of tax revenue and the tightening up of real estate activity with a higher LTCG rate, and the pressure to reduce it again. In that scenario, if you can ride out the interim increase in LTCG rates, no need to sell for a higher basis.

Rich, an easy one is with the many retirees who expect to have less than $65,100 in taxable income during 2008 (excluding capital gains). This year, and through 2010, capital gains in the 15% and 10% brackets are taxed at 0%. You can imagine scenarios where it pays to do sales & repurchases each year just to realize enough gains to fill up the 15% bracket. There's still state tax and taxation of Social Security to consider, but 0% is hard to pass up.

-Tad

To the best of my memory, cap gains increases have always been retroactive to some extent. They want to prevent rush sales like you suggest. Think what it would do to the market otherwise.

-- Doug

Isn't one of the standard things to make the effective date of the increase be the date that the bill was first introduced (or the date that the Congresscritters made it clear the bill was going to be introduced)? The idea being that people have been put on notice as of that date that a tax increase is in the cards.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Things should become clearer after the elections in November of this year. Can't I assume that the next President and Congress are not going to tinker with the laws of the 2008 tax year?

"TB" wrote

-- The dollar figure above is for Married Filing Jointly.

-- This general guidance applies to retirees and non-retirees alike.

-- The taxable income amount above excludes long term capital gains and qualified dividends. That is, qualified dividends are also taxed at 0% for this income for MFJ.

-- Nitpick: It's $65,100 or less for MFJ.

-- For single people (and not head of household blah blah), a taxable income of 32,550 or less (excluding LTCGs and qualified dividends) will result in a tax rate of 0% on LTCGs and qualified dividends.

See

As the regulars know, beware the 30-day wash sale rule as you "step up your basis" tax free, income allowing per the guidance above.

Many retirees have substantial income from qualified dividends, so this could be a fantastic year (or few years) for low taxes for them and taking those LTCGs.

For the less versed, taxable income of course refers to income after deductions and exemptions, or line 43 on the

Richard, re your comment on candidate Edwards: Couldn't resist putting in your own puny personal politics, eh? What you say about candidate Obama is barely better.

Any paid advisor who does not discuss stepping up capital gains per the above is remiss in his/her responsibilities, AFAIC. The savings are not peanuts. As Joetaxpayer might also remind us, another option to consider, maybe especially for retirees with a lot of qualified dividends, is converting some of one's Trad IRA to a Roth IRA.

I think wash sale rules only apply to losses, not gains.

-- Doug

I sincerely hope the regulars do not "know" that, since if they did "know" that, they might get in trouble for giving negligent advice.

Before offering more tax advice to "the regulars", you may wish to avail yourself of the opportunity to review basic taxation of investments. As an example, the wash sale rule only applies to sales that realize losses, and there is no rule which allows (let alone requires!) the deferral of gain when a realized gain occurs +/- 30 days of a purchase of the same security.

-- Rich Carreiro snipped-for-privacy@rlcarr.com