What You Need To Do With Your Investments Before 2011

Uriginal Post: http://blogs.forbes.com/investor/2010/11/16/what-you-need-to-do-with-your-investments-before-2011/?boxes=Homepagelighttop

Nov. 16 2010 - 9:34 am Posted by Chris Barth

Investors looking to make the most of their money should pay attention to the calendar; the end of the year is approaching, and it brings with it potential tax repercussions. With favorable tax rates on capital gains in danger of expiring in 2011, investors have a month and a half to crunch the numbers and make a hold ‘em or fold ‘em decision.

Barbara Weltman, an expert from tax resource JK Lasser, has some advice for how to make the most of your 2010 investments, whether gains or losses.

Tax Rates

Central to the decision-making process are potential spikes in tax rates after year’s end. Currently, capital gains from the sale of long-term securities—as well as most ordinary dividends on stocks and equity mutual funds—have a 15% maximum tax rate for higher income individuals and no taxes at all for the bottom two tax brackets. If President Bush’s 2001 and 2003 tax cuts are not extended, the lowest tax brackets would no longer be exempt, and the cap on the upper tax brackets would increase. While the recent Republican surge makes it less likely that tax rates will change in 2011, particularly for the wealthy, the likelihood of a compromise being pushed through Congress before the end of this year has increased.

“Capital gains rates won’t be any lower next year,” Weltman points out.

Whatever happens during this session of Congress, you can be sure that the tax rates won’t decrease. An extension of present rates could keep taxes down through 2012, but it is highly unlikely they will drop below current rates in the foreseeable future. If Congress fails to take action—an admittedly unlikely situation—the tax rate for upper tax brackets could more than double, reaching as high as 39.6% taxes on qualified dividends.

So what should you, the investor, do before New Years?

Harvest Gains Before Year-End

While tax rates should not be the sole impetus for investment decisions, keeping an eye on policies and potential tax rate changes can help you make sound decisions, particularly with the potential for increased rates in the future.

If you find yourself on the positive end of things, you may want to consider selling appreciated securities to harvest gains that will be taxed at current low rates. Creating these capital gains now allows you to claim them at what Weltman calls, “probably the lowest rates ever.” There are no restrictions on reacquisition of stocks sold for gain, so you can feel free to sell at current rates and reacquire whenever you so choose, letting you increase your basis while maintaining your tax position.

There are other ways to capitalize on the current tax rates before they expire, in addition to selling for personal gain.

"If you provide support for your parent who is in the 10% or 15% tax bracket, you might want to give appreciated securities rather than cash and allow your parent to sell the securities and use the proceeds for support,” Weltman says.

With regards to losses, there is no real tax advantage in acting before year-end. While realizing losses may allow you to reinvest and strengthen a weak portfolio, it is otherwise a wash whether that realization occurs in 2010 or 2011. In fact, investors predicting a bullish market may want to keep their losses unrealized in hopes that they become gains.