Paying Taxes Now or Later?

Investment income is taxed at either long-term or short-term capital gains tax rates. If you hold an investment for more than a year, then you pay the lower long-term capital gains tax rate. The long-term tax rate has been lower than the short-term capital gains tax rate for decades. Congress may raise the rate to match the short-term rate, and that could be a big tax increase for many investors. In the past few years, many equities have increased in value, a lot!

What can you do about it? You have several options: Consider paying taxes this year instead of waiting until next year. Sell some of your winners and realize those taxes. Set aside some of your earnings, if you have to, and plan on paying the taxes in April, 2022. Talk with your advisor and see if this is a prudent decision. Learn how you can see your current unrealized gains on the website at any time.

You can view your long-term and short-term capital gains on our website. If you would like help, please call the office. Your advisor will be happy to help you find it. Using the “Liberty” website, you can see unrealized gains, both long and short. You can see when the short-term gains will become long-term gains. You can see all of your realized gains–for which you will owe taxes. You can then plan and prepare for any tax problems you may have.

Investments held less than 365 days are taxed at the same tax bracket as your income. This tax bracket is higher than the long-term capital gains rate. Congress is considering increasing the tax rates for the people in higher income tax brackets. If it is appropriate to hold that investment, then waiting until it is a long-term capital gain makes sense. However, if Congress eliminates the lower tax rate for long-term gains, then it gives you no additional tax benefit to hold an investment for the long-term.

What can you do about it? If you have income that is taxed at short-term rates, then you may want to realize these gains this year not next year. In some ways, eliminating the benefit for long-term taxable investments simplifies the investment decision. If the tax increase does go through, the investment decision is purely an investment decision without the tax confusion. On the other hand, for years, many people have argued that it is better for society to encourage long-term investment behavior. A tax increase would discourage that thinking, or at least eliminate the tax incentive for long-term investing.

If you believe income taxes are going to increase, then you may want to realize income today instead of later. Right now, the rumors about possible tax increases are numerous and unreliable. The planning decisions we can make today must be made with an unclear tax future. We have every indication that the President wants to raise taxes and that Congress may oblige. Our decision today, with the help of your planner, is whether or not to expedite any of this income.

What can you do about it? Consider a Roth Conversion and bring forward that income that you would otherwise defer until later. Consider IRA withdrawals as appropriate for expenses that you may have otherwise deferred. Consider selling property, a business or other income-taxable decisions that you otherwise might be able to push off until the future.

The Federal government is spending money at an unprecedented rate. Old school economic theory says that the government needs to pay for the expenses. Old school thinking says the government will either raise taxes or the economic growth will outpace the expenses. Today’s leaders are not using old school thinking. They are paying lip service to “pay for” rules that used to govern their bills. New school thinking is called Modern Monetary Theory, and this is what the government is practicing. The new school way of thinking says that the government does not need to pay for the money it creates. The real risk of the government creating all this money is inflation. The old school says too much money chasing too few goods and services creates inflation. The new school says that just isn’t so. Only time will tell whether the MMT new-school is right, or the time-tested old school economists are correct.

Change is tough. These past few years have seen massive changes in the way we work, interact, educate, travel and go about our daily lives. Changes to tax laws are small in comparison, but the long-term effects on our personal financial plans can be substantial. Talk with your financial planner about what you can do today.