Look out: Capital gains taxes going up
Beware of market declines as the end of the year gets closer.
Now that the election is over, everyone is talking about the elephant in the room. Our deficit and debt levels are outrageous and are causing the rest of the world to question our integrity as a nation. Although the U.S. dollar continues to be the reserve currency of choice for safe haven investors, many people wonder just how safe Treasury bonds can be when the United States continues to rack up trillions of dollars of new debt on what seems like an endless basis.
With President Barack Obama back in office everyone expects some level of higher taxes and lower spending, but no one wants to see the fiscal cliff.
Touted by the media, the fiscal cliff has brought eyeballs to newspapers, financial websites, and business journals, but this coined phrase is not nearly as black and white as it may seem to the passive eye. Some people actually believe that if we avert the fiscal cliff everything will be fine, but many of those people are also forgetting about the elephant in the room. The fiscal cliff is a combination of higher taxes and lower government spending, we all know that, but the negotiations that might help us avert going over that cliff are also entertaining the same two economic headwinds.
In order to reach an agreement to avert the fiscal cliff, our government must reach an agreement on higher taxes and lower spending. These are each material economic headwinds that are coming very soon, whether we go over the fiscal cliff or not. In fact, I will go so far as to tell you that capital gains taxes will be going up next year. That alone should be reason to worry.
Of course, I also believe that other taxes will increase; I know government spending will also decline, but it is the capital gains tax that actually might be most important to us as investors in the stock market. Although buy-and-hold investors are still underwater from where they were in 2007 and even 2000 for that matter, proactive traders or other lucky investors who got in nearer the lows are holding significant capital gains. If capital gains taxes were to revert to normal income taxes the difference in actual after-tax performance would be significant.
For example, for every $100 million invested that is carrying a 30% gain, or $30 million in unrealized profits, the difference between selling at the end of 2012 versus any time afterwards would prevent an effectual doubling up on income tax. In this example, selling in 2012 could save about $6 million in taxes.
Unless you feel the economy is good enough to allow the stock market to continue to increase beyond these multiyear highs, a reasonable investment professional will seriously consider securing gains before the end of the year. Not all investors would do this, but enough investors are worried about it to rationalize lower market levels in the months ahead.
With that understood and in line with my macroeconomic work (The Investment Rate), which is much more dire than merely what the higher taxes-lower spending headwinds might suggest, I continue to advise all people to move their entire 401(k) positions to cash, sell all buy-and-hold investments, and for now we are still close enough to relative market highs to make short positions OK. Right before I wrote this article, I ran a real time filter for longer-term short ideas using the Long-Term Trading Filter Tool on Stock Traders Daily, and four stocks appeared prominent at the list: the Financial Sector SPDR (XLF), International Paper (IP), Cardinal Health (CAH) and PepsiCo (PEP).
If you follow these, use integrated risk controls because the technical patterns of the market tell us a short-term bounce can come. But the declines from longer-term resistance towards longer-term support have already begun, so increases from here will likely be short lived and the economic headwinds that are coming will change the sentiment on the street considerably.
More from Top Stocks
Their comes a time when you have to pay the piper. Credit card abuse. Bad rating and high interest.
Our government has the same responsibility. Face the truth and work to make it better. Capitol gains should better treated the same as any income. As a blue collar worker I am basically taxed on my time which I sell to survive.
GO AFTER THE DAY TRADERS, NOT THE LITTLE GUY WHO BUYS AND HOLDS!!!
WHERE'S THE HUMANITY?
Don't forget that good ol' Mitt changed his last two tax returns!
IF only we could retroactively tax Mitt so that he pays his fair share!
I don't understand all the whining about capital gains going from 15% to 20%. At the same time, these whiners supposedly want our deficit reduced, and our economy to recover. You can't do that without increased revenue, and this is the time. It's remarkable how spoiled wealthy investors became from the Bush-Cheney years. But we all know where it left the economy.
Our economic recovery badly needs this shot in the arm, along with a modestly higher income tax rate on the wealthiest earners. Even Ronald Reagan, after first reducing the top income rate to 28%, a level not seen since the Hoover-Great Depression years, recognized the need to partly make up for it and proceeded to raise capital gains to 28%. As I recall, stocks and real estate did pretty well in the '80s.
I repeat, I don't understand the whining about Obama wanting to raise capital gains to 20%. I think he's been pretty reasonable, and gone quite easy on things by historical standards.
in a way its nice to be a little better than poor
dont worry be happy live cheap
If capital gains taxes were to revert to normal income taxes the difference in actual after-tax performance would be significant........For example, for every $100 million invested that is carrying a 30% gain, or $30 million in unrealized profits, the difference between selling at the end of 2012 versus any time afterwards would prevent an effectual doubling up on income tax. In this example, selling in 2012 could save about $6 million in taxes.
First, capital gains cannot REVERT to normal income taxes, they went from 20% (not normal income tax rates) to 15%.
From Wikipedia: The tax rate on long-term gains was reduced in 1997 via the Taxpayer Relief Act of 1997 from 28% to 20% and again in 2003, via the Jobs and Growth Tax Relief Reconciliation Act of 2003, from 20% to 15%
Second, given that above, selling off in 2012 to realize $30 million in gain
will NOT result in a DIFFERENCE of $6 million, but a difference of 5% (20% - 15%) times $30 million = $1.5 million, yes, still a lot more money than I have, but if you consider that a working couple making a combined $90K is in the 25% tax bracket, someone getting $30 million for investing really shouldn't b1tch about paying 20%.
Finally, this writer says: " I continue to advise all people to move their entire 401(k) positions to cash,"
Qualified retirement plans such as 401Ks or IRAs do not get capitail gains treatment, ever. There is no tax as long as the money is held in the accounts. When any money is withdrawn, it is treated as ordinary incomes, always, not capital gains, a 15% vs. a 20% capital gains rate is a non-issue on withdrawals. So move all your money to cash, and then what, earn .5% interest with inflation at 2%-3% in the future. Seems to me that the stock market still did pretty good in the 1990s with a tax rate of 20%, how did it compare the last 10 years at 15%?
I think Sam Snead was and always will be the best and greatest golfer ever. He won 84 PGA touraments, and Jack Nickolas won next place with 73, and then all the others.
Not only that, Sam won 144 touraments "world wide", dozens more than anyone else.
Sam was number 1, and then would be Ben Hogan number 2, and Eldrick would be way down the list.
OBAMA SAID HE WOULD DO ALL THE LEFT WING SOCIALIST CRAP HE'S DONE SO FAR AND MORE AND PEOPLE STILL
VOTED FOR HIM NOT ONCE BUT TWICE! WAIT TIL OBAMA DEATHCARE KICKS IN AND SHORTAGES OF ENERGY AND
FOOD AND PRICES CONTINUE TO CLIMB! HIM AND THE DEMOCRATS WILL HAVE A NICE XMAS BUT THE REST OF US ARE
STILL SUFFERING FROM HIS FIRST FOUR YEARS! THE HURRICANE VICTIMS ARE PERFECT EXAMPLE OF INCOMPETENCE
OF OBAMA AND FEMA AND DEMOCRATS AND BIG GOVT! THIS IS WHAT YOU VOTED WELL YOU GOT IT NOW! SOCIALISM!
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The company, headed for an IPO later this year, is worth as much as 10 Tesla Motors combined, says Bernstein's Carlos Kirjner.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.