Published in the March 30 – April 12, 2016 issue of Morgan Hill Life
By Marisa Otto
Marisa Otto
As we approach the April 15 tax-filing deadline, you may be wondering how your actions can affect the amount of taxes you pay. Of course, you don’t have total command of some tax-related components, such as earned income. But one area in which you do have a degree of control is your investment-related taxes. And since 2014 was a decent year for the financial markets, you may have some gains. If you decide to sell some of your investments to “lock in” those gains, what would be the tax consequences?
The answer depends on your tax bracket and how long you’ve held the investments. Our tax code rewards those investors who hold investments for longer than one year. Consequently, short-term capital gains — earned on investments held for less than one year before being sold for a profit — are taxed at an individual’s ordinary income tax rate, which for 2014 can be as high as 39.6 percent. However, long-term capital gains, earned on investments held one year or longer, are taxed at just 15 percent for most taxpayers and 20 percent for those in the 39.6 percent bracket. You’ll need to check with your tax advisor on your specific situation.
From a tax standpoint, you may be better off keeping your profitable investments at least one year before selling them. But are there other reasons to hold investments for the long term?
Yes. For one thing, if you are constantly buying and selling investments, you won’t just incur taxes — you’ll also rack up commissions and fees.
Also, if you are always buying and selling, you may be doing so for the wrong reasons. You might be chasing after “hot” investments, even though by the time you buy them, they may already be cooling off — and, in any case, they may not even be right for your needs. Or you might decide you need to “shake things up” in your portfolio because you haven’t liked what you’ve seen on your investment statements for a particular time stretch. But if the overall market is down, it tends to drag everything down with it — even quality vehicles that still have good prospects.
Rather than chase after hot stocks or react to short-term price movements, you may be better off by following a “buy-and-hold” strategy in which you purchase investments appropriate for your needs and then hold them for the long term. However, you may still need to make transactions, but only if it’s really necessary.
If you want to cut down on capital gains taxes, holding quality investments for the long term makes sense. As for an investment strategy, a buy-and-hold approach can work well for you — long after tax season has ended.
Marisa Otto, CFP®, Financial Advisor, Edward Jones U.S.A., can be reached at (408) 778-4400, or at [email protected] or visit www.edwardjones.com.
