Are you thinking about bailing out of stocks before year-end while the capital gains rate is low? Before you hit the sell button, think it over carefully. For now, the long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. Next year, those rates could rise.
Current L-T Cap Gains Tax Rate
|L-T Cap Gains
||$0 to $40,000
||$40,001 to $441,450
||$441,451 or more
Yes, it is possible that some upper-income taxpayers will pay a higher tax rate on long-term capital gains starting next year. This will no doubt be negotiated further as our political leaders wrestle in Washington.
At this point, we also really don’t know whether taxes will rise, or by how much. There is a lot of publicity about this, but only time will tell.
As such, some investors are thinking about selling now to lock in the 15% rate and then buying back the same securities if they think they will rise further. There might be some merit to that strategy, but don’t move too fast.
Remember the Alternative Minimum Tax
One potential drawback is the alternative minimum tax (AMT). If you are subject to AMT, the 15% capital gains rate could effectively become 26% or 28%, because of how the AMT is currently calculated.
Those who are subject to AMT typically have relatively high incomes. And essentially they calculate their income tax twice — under regular tax rules and under the stricter AMT rules — and then pay the higher amount owed.
Here is one way to look at it: the AMT runs along the same lines as our standard tax system, but it has a different tax rate structure and eliminates some common tax breaks. And while there are seven federal income tax brackets (for now) ranging from 10% to 37%, the AMT has two tax brackets: 26% and 28%.
AMT Exemption Amounts for 2021
|Income at which
exemption begins to
It would be a shame to sell now to lock in a 15% tax rate when actually you’d end up paying more than if you waited. Will you be subject to the AMT next year? Tough to say, because Congress could change the rules and subject millions of more taxpayers to the AMT next year.
But with all of that being said, you should not base investment decisions solely on taxes. What matters is how much profit you get to keep after taxes and how well your portfolio is positioned and diversified. But before rushing to lock in a 15% rate, be sure to consider all of the variables.
Sit down and talk with your advisor before making any rash decisions.
With help from our financial advisor, Dallas Lee Whittaker, you can manage your finances and achieve your goals.
Dallas Lee Whittaker CMFC, CLU
Senior Vice President
Dallas has over 20 years of experience in all areas of wealth management and financial services. He is passionate about adding value to the lives of his clients through education and addressing their financial goals in a collaborative manner. With a deep knowledge of insurance which is an added benefit when doing financial planning, Dallas is an asset to our clients and the Marine Bank Wealth Management team.
Dallas currently holds a Chartered Mutual Fund Counselor (CMFC) designation awarded through the College for Financial Planning and a Chartered Life Underwriter (CLU) designation through the American College. As Senior Vice President of the Marine Bank Wealth Management Department, Dallas focuses on comprehensive financial planning to help individuals and businesses achieve peace of mind in their financial lives with an emphasis on retirement strategies, legacy planning, and generational wealth management.
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