Do You Know of the New Tax Rate for Really Long-Term Capital Gains?

With taxes on ordinary income, capital gains, and dividends poised to go higher next year, barring congressional action to reverse the increases, many investors are wisely strategizing about what those higher rates could mean for their portfolios. If dividends are again taxed at ordinary income tax rates, for example, that argues for ensconcing them within tax-sheltered accounts to avoid getting hit on those distributions on a year-to-year basis.

Higher long-term capital gains rates, meanwhile, strengthen the case for preemptively realizing gains for securities you wanted to lighten up anyway. Why pay capital gains tax at a 20% rate next year (if you're in the 20% tax bracket or above) if you can sell today and pay a 15% tax on that gain? You can also repurchase the same investment right away--no wash-sale rules apply to capital gain harvesting--but your new position will have a higher cost basis than if you had stayed put, thereby reducing the taxes you'll owe when you sell later on.

Yet another tax rate that is set to go into effect has received much less play: In 2013, the tax code is set to reinstate an additional capital gains rate for investments held for more than five years.

Taxpayers in the 10% and 15% tax bracket will pay an 8% tax on their gains from securities and other property held for more than five years, while those in the 25% and higher tax brackets will pay 18%. To qualify for the five-year rate, you must have purchased the investment after Dec. 31, 2000.

Thus, the tax code in 2013 will feature three distinct holding-period bands for capital gains:

• One for investments held for less than a year, taxed at the short-term capital gains rate, which is the same as your ordinary income tax rate
• One for investments held between one and five years, taxed at either 10% or 20% starting in 2013, depending on your tax bracket
• One for investments held for more than five years, taxed at either 8% or 18%.

Source:  Christine Benz, Morningstar

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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