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Federal Capital Gains Tax Rate Update - Raising the rate…
By Admin | October 22, 2007
To most people in the financial and tax worlds the impending federal capital gains tax rate 
hike in 2011 is no new news.
This has been scheduled since the 2003 capital gains tax rate changes and should really be no surprise to most people.
However, with this federal capital gains tax rate increase (set to increase to 20% in 2011) is this a sign that everyone should run and sell off all of their assets before then to take advantage of these low rates?
For most people… I’d venture to say no. Letting tax rates control an investment strategy is not usually a great idea. However, there are certain people in certain situations that may benefit greatly from this lower federal capital gains tax rate period.
Here’s who should consider selling before 2011 to take advantage of the small capital gains tax rate savings:
- People who own stocks, real estate, etc. that were going to sell before 2011 anyway and have no plan or desires whatsoever to defer the capital gains tax to future years. Some people want to sell off a block of stocks to help fund a new business venture… or pay off debt… or immediately invest in another investment vehicle. For these people who have full intentions of selling soon and have no desires to defer the tax… you should mark January 1st 2011 on your calendar and try to get your asset sold before then.
- People in the 10% and 15% income tax brackets. For most people who own highly appreciate assets that would trigger a large capital gains tax bill… they probably are not in these lower tax brackets. Darn it huh? But for those who are… the capital gains tax rate for these income tax brackets the typical rate is just 5%. After January 1st 2011 their minimum capital gains tax rate is likely to climb to 10%. Still not a bad rate. However, people in the 10% and 15% brackets should immediately go to their calendars and mark January 1st 2008 through December 31st 2010. As it currently is, there is set to be NO FEDERAL CAPITAL GAINS TAX RATE for you! Yep, as the law is currently written, you can sell capital gains tax free during those years.
If you do not apply to the above two groups, you should seriously crunch the numbers before you choose an exit strategy. On one hand, many CPA’s out there are advising their clients to simply pay the capital gains tax and be done. While this may be good advice for some sellers… there are many sellers out there who would benefit greatly from a capital gains tax deferral strategy.
When you compare simply paying the tax to a capital gains deferral strategy you need to keep in mind that capital gains tax is paid according to the tax rate in the years you receive funds. So, once the capital gains tax rate climbs in 2011… you may be subject to a bit higher tax rate.
However, when you defer your capital gains taxes, depending on the strategy, many times you earn a pre-tax rate of return that can more than offset the extra capital gains taxes you may pay.
So, always basing a decision on just the tax rate can be a costly mistake. Sit down with your financial advisor and put everything on paper. Make a fact based decision based on actual numbers… not just the tax rate.
I stumbled on a good article in the Wall Street Journal about the upcoming capital gains tax rate hike. Take a read.
==> Wall Street Journal Article
Bottom line, if the facts support selling and paying the tax now instead of a deferral strategy… go for it! If a deferral strategy actually helps you come out ahead… consult with a qualified exit planning specialist to craft a solid plan.
Topics: Capital Gains, Daily musings |
October 22nd, 2007 at 8:58 pm
[…] Capital gains tax rates to rise […]
November 29th, 2007 at 1:24 am
The comment you make about ” NO FEDERAL CAPITAL GAINS TAX RATE” if you are in the 10-15% bracket is only true for the amount of gain that falls within that income bracket. If you have a capital gain of $200,000 and assume zero other income you will only have a 0% capital gain up to the 15% income limit as I read the legislation.
November 29th, 2007 at 1:30 am
Hi Carol,
Completely true, and thank you for clarifying that for our readers.
Just like you mention, there is no capital gains tax up to the 15% income tax level… then after that it is taxed at the according capital gains tax level based on the income from that year (capital gain included).
Sometimes when you get to writing… you forget to clarify things as well as they should be.
Thanks again!