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Last-minute tax move doesn’t hold up under scrutiny

Fred Williams

I was about to sell off my stock holdings to save on taxes when a realization struck:  The advice to do this was not as good as it had sounded.

After Jan. 1, the capital gains tax rate will rise to 20 percent, from 15 percent. This is likely to happen regardless of deal-making in Washington. The break on taxes for investments isn’t expected to continue, even if lawmakers soften other tax hits embedded in the fiscal cliff.

Some financial advisers say you should consider dumping your winning stocks now. You can buy them back right away if you think they have more upside. This triggers a taxable gain at the current, 15 percent rate, but raises the cost basis of the stock to the current price. This way, only new gains in value — if you are so lucky – will be subject to the higher, 20 percent capital gains rate.

So I logged onto my online broker’s site and started filling out the sale form. Goodbye, Ford Motor Co. shares, I thought.  You roared back from the dark days of early 2009, as I hoped you would. Too bad General Motors shares didn’t do the same – those are already gone from my holdings, after bankruptcy wiped out their value.

During this bittersweet leave-taking, the snag in my plans reared up. The sale form at my online brokerage reminded me that dumping the winners would cost money.  Selling the Ford shares cost $7, and it would cost another $7 to buy them back, for a total of $14. Even at those low prices, the unexpected cost for the transaction undermined the idea.

For small fry like me, the commissions add up. I just dabble in stocks based on hunches and guesswork, leaving the real investing to mutual fund managers at my IRA. So my “portfolio” amounts to shares of eight companies. The long-term taxable gain on those shares is about $3,000.

By selling the shares now and buying them right back, I would avoid $150 in capital gains taxes that I might have to pay at the coming 20 percent rate.  But the strategy will cost me $112 in commissions, at $14 for each of the eight stocks.  Is it worth it to save only $38?

More important, I might not save anything. Those higher taxes will not materialize if I’m wrong about the stocks’ continued growth, which is entirely possible. If the value of the shares falls instead of rising, I will have paid taxes on the gains unnecessarily.

The advice to turn the portfolio over came with a warning that I had overlooked: Triggering a tax hit now instead of putting it off until later is the opposite of standard financial strategy.  It makes sense to sell stocks now if you were planning to sell them soon anyway, and pay the lower capital gains rate. Otherwise, why pay taxes now that you can put off? We don’t know what the future holds. Except for this: I will be taking those Ford shares along for the ride.

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