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Year-end Tax Planning: Should I Sell My Securities Before Year End?

October 31, 2012

Should I Sell My Securities Before Year End?

With personal tax rate increases on the horizon for 2013, a typical year-end planning discussion with a client often times involves the issue of whether or not to sell securities before year end to take advantage of the current 15% federal long-term capital gain rate. The 15% tax rate on capital gains is very low by historical standards.

If Congress lets the Bush tax cuts expire with no further legislative action, for 2013 the long term capital rate is scheduled to increase to 20%. That rate increase does not include the newly enacted 3.8% Medicare tax on the unearned income of certain high income taxpayers. That puts 2013 long term capital gain rates for high earners at 23.8%, or 8.8% higher than the current 15% rate.

I am always conflicted about the decision to sell an appreciated security at year end solely to take advantage of tax rates. While the tax savings between selling this year versus selling next year are clear, the prospect of an increase in value of the asset being sold is always in the back of my mind.

Take the example of a stock worth $20,000 (with zero tax basis). A sale in 2012 yields a federal tax $3,000 and after-tax proceeds of $17,000. Under the same set of facts, a sale in early 2013 produces a tax $4,760 and after-tax proceeds of $15,240. That’s $1,760 less than the after- tax proceeds generated by the sale of exactly the same asset in 2012.

To achieve the same $17,000 after-tax result in 2013, the $20,000 asset would need to grow over 11.5%, to $22,309. Growth in excess of 11.5% produces more after-tax liquidity even with the higher tax rate. If one views the possibility of that kind of growth as achievable, the decision to sell in 2012 and forgo the growth on the tax dollars is a struggle.

This simple example illustrates that the decision of whether or not to sell appreciated securities (or any other asset), before the end of 2012 is not an easy decision and there are many factors to take into account.

Like most business or investment transactions, the tax tail can never wag the dog. The decision to sell an appreciated security before year end needs to take into account a variety of non tax factors including the anticipated growth rate of the security, the concentration of the holdings and the need for liquidity. While low tax rates are certainly enticing, the decision of whether or not to sell a security needs to be carefully considered.

For help with determining if your appreciated securities should be sold before year end please contact any member of our Tax Strategies and Planning Group.

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