SUBSCRIBE NOW

MAKING CENTS: Don't let taxation drive your investments

John Napolitano
CFP CPA
Smyrna/Clayton Sun-Times

In theory, a good investment is one that you buy low and sell later for a higher price. This is easier said than done, but the past decade has delivered solid returns for many investors who took some risk. The only issue is that the notion of paying capital gains taxes is so unappealing that investors delay selling until their investment starts to decline and they get nervous.

Unfortunately, this rationale is a bit flawed and not always worth the wait for many reasons. Unless you plan on dying with a certain stock or leaving it to charity, your built in capital gains and the ensuing taxation isn’t an “if,” it’s a “when.” This assumes that the value of your asset doesn’t come crashing down to below its acquisition price. And P.S., one way to prevent your investment from crashing down is to sell when you do indeed have a gain.

When a portfolio drifts, allocations may become unbalanced and the risk inside the portfolio increases without warning. Imagine if your riskiest investment that was intended to occupy 10% of your portfolio suddenly represented 25% or more of your portfolio simply because of excellent performance. Do you now sell? Many experts may say yes, unless that money is purely excess that you can afford to lose.

There are strategies to curtail your capital gains tax, and this thinking should always be a part of your investment plan. Start with a keen awareness of your taxable income and tax rate. Case in point, for taxpayers in the lowest income tax bracket, the federal capital gains rate is 0%. You’d be shocked how many retirees are in low tax brackets holding on to their grandpa’s stocks because they’re afraid of getting hit with taxes when they could implement a long term selling strategy and pay no federal taxes at all.

The next strategy is for those in the next group of tax brackets, joint filers with taxable incomes between $78,751 and $488,850, the capital gains rate goes to 15%.

In my opinion, when it comes to keeping your portfolio balanced, this shouldn’t deter you. What may be a deterrent, however, is if your sales of appreciated assets bumps you up to the next tax bracket. This would cause your capital gains tax rate for federal purposes to sneak up to 20%. Of course, don’t forget the 3.8% Medicare surtax that’s applied to all joint filers with adjusted gross income above $250,000. I’m sorry if I’m losing you in the details, but who ever said that taxes were simple?

Long story short, I believe it’s unwise to hold onto assets simply to avoid paying taxes on the gain. Get good advice, and make sure that your advisor has a little tax nerd in their DNA.

John P. Napolitano CFP®, CPA is CEO of U.S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.