Taxes, taxes, taxes. While I rarely write about taxes in these articles because I believe all traders should work with a tax professional in coming to an understanding of tax consequences of various strategies I do understand that taxes are important to all of us. I have spoken to far too many traders over the years who have refused to close a profitable position because they would have to pay taxes on the gain. Unfortunately, at times, those gains disappear and the trader finds himself holding a losing position, but at least he doesn't have to pay taxes on the loss. I guess I'd rather pay the taxes on the gain myself.
In any event, assuming the "tax breaks" we were "given" by our political representatives expire as they are scheduled to do, we all will be looking at a much different tax picture next year. Brackets will be higher than they presently are, the capital gains rate will increase, and instead of paying 15% taxes on dividends, we will see that rate increase by 260% to 39%. These are noteworthy hikes and to my mind require every trader to reassess his plan. The first revision may come in the voting booth, but regardless of their political agenda, traders may want to rethink how important dividends may be and whether they want to give as much emphasis in a portfolio to dividend paying issues.
Capital gains taxes are set to increase from 15% to 20% so if one has a long term capital gain of $10,000 by the end of this year, he will need to have increased that gain to $10,625 in 2011 just to walk away with the same after tax cash. The trader who makes short term capital gains may well find himself in a higher bracket even while making the same before tax profit. Issues such as these deserve the trader's attention.
Where once the trader may have sought dividend income, he may now direct his plan more to achieving capital gains, long or short term. Some long term gains may be taken before years end to avoid the additional 5% capital gain tax. As is generally the case, many of the issues that will arise will affect different traders differently. The point is that now may be a good time to contact a tax professional in deciding whether or not to make changes in the trading plan, and, if so, what changes to make.
I don't mean to solicit political rhetoric on the blog. Frankly, I am sick of political rhetoric in general and sick of the hypocrisy and dishonesty of many politicians in particular. I believe members of Congress should be bound by the same laws as the rest of us and I am angry that they are not. However, the only point here is that we are about to face a huge tax increase and it will affect the net amounts we achieve in our trading and investing. I simply suggest that we each look out for ourselves as best we can in the tax arena and that often requires some planning ahead with the help of a tax professional.
Please understand that I am neither a tax professional nor tax adviser, simply a taxpayer like most of my readers. This article is not meant to be and is not tax advice. That function must be left to those who do it for a living. I mean only to raise levels of awareness that there are massive tax hikes ahead so that you can take whatever action may be necessary in your own individual case to limit as much as legally possible the ramifications in your own life.
by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved
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