Thursday, July 09, 2009

Is The Capital Gains Tax Rate Going UP?

For years now, CPAs, financial advisors, realtors, etc. have been telling their clients to sell their assets now because capital gains tax is at the lowest it has been in years.

This is true, and in some cases a wise move. However, these advisors usually have some personal interest in having you sell your assets such as a sales commission, another place to put the funds to make them money or simply because they don’t know there may be another way that would save you money.

Typically, if the asset is valued under 100K I tend to agree. Especially if you live in a state with no capital gains tax or are in a very low income bracket.

Will capital gains tax rates be going up? Probably, and probably in the not too distant future. We Americans will have to pay for all this money our government is doling out to the big companies and banks, etc. Not that they are sharing it or helping the average Joe as they promised, but don’t get me started down that road….

However, there is an argument to be made for deferring tax or spreading out the payment of tax even if the tax rates rise. Here are the main reasons why.

1. If you can earn interest on money you would have had to pay all at once up front you usually still make out even if tax rates rise.

2. If tax rates go up, interest rates usually go up as well

3. Tax rates go up and tax rates come down over long periods of time. You pay them as you receive them, so you will pay higher rates in some years and lower rates in others, but you are only paying on a portion of each installment.

4. When you pay in a lump sum and invest the remainder, it takes a very long time just to get back to where you started and in most cases you still have to deal with taxes on interest or dividends which is taxed at an even higher rate.

5. People in general tend to manage money better when it comes as an income stream and not as a lump sum. Just look at lottery winners and sports stars.

Don’t just look at one factor, such as the current capital gains tax rate to make your decision when selling an asset. You need to look at your entire financial picture, your present and future needs, and plan for the overall best outcome.

Also, don’t rely only on the person who stands to gain from your selling and paying upfront. If the rates go up, their advice will be the same, though probably with a different rationale. That is how they make their living.

Paula Straub