Companies have been awarding special dividends to beat an anticipated tax hike next year, but as uncertainty about the "fiscal cliff" continues, the path for the average investor is less clear.
Some financial experts say it's time to sell stocks to avoid higher capital gains taxes next year, but others advise snapping up those shares that tax-wary investors are dumping.
"There's a big cloud over all of us today because of all this uncertainty and how that will affect the stock market," said Art Ford, a certified public accountant and financial planner at Sullivan Bille in Tewksbury. "There's a concern people may lose money if they don't do something."
If Congress fails to reach an agreement by Dec. 31 on how to reduce the deficit, steep cuts in federal spending will take effect, and the Bush tax cuts will expire.
"The usual tax strategy is to defer income and accelerate deductions," said Jim Bailey, tax partner at Blum Shapiro in Rockland. "But given the fact that rates may rise next year, we've been advising clients to consider doing just the opposite."
Unless Congress acts, the capital gains tax rate, for example, will go from 15 percent to 20 percent for most filers. So someone who paid $30 for a share of a stock that's now worth $100 could sell it this year, pay 15 percent on it and buy it back next year at $100, Bailey said.
Other advisers are suggesting that clients accumulate cash in their portfolios.
"I'm not selling stocks," said Barry Armstrong, president of Armstrong Advisory Group, a Needham wealth-management firm. "The closer we get to the 21st (of December), when Congress is expected to go home, the worse it'll be for stocks."
Instead, Armstrong is buying what everybody else is selling because those stocks are cheaper now than they most likely will be next year.
Evan Dangel, senior vice president at Morgan Stanley, said the likelihood that Congress is going to reach an agreement by the end of the year is "slim to none."
"We think taxes are going to be higher next year no matter what," Dangel said.
His advice is four-fold:
• Sell some stocks to realize long-term capital gains in your portfolio because the tax rate now is only 15 percent.
• Make sure you've contributed as much as you can to your 401(k).
• For the wealthiest taxpayers, deductions for charitable donations could be curtailed next year, so accelerate any charitable giving you plan to do this year.
• The stock dividend tax rate, which is now 15 percent, will probably be higher next year. People in the highest tax bracket, for example, could end up paying more than 40 percent. So you should consider tax-free municipal bonds and invest in stocks that don't pay dividends.
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