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December Will Be Taxing.....or maybe not.

As the year draws to a close, it’s normal that our attention would be turned to income tax management. 

What’s not normal is that this year, if the laws play-out as they’re legislated, we’ll be turning the tax world upside down. 

Normally, we’d be looking to take tax losses and postpone gains, however, this year we’d be looking to do just the opposite, we’d be looking to take gains and shove those losses out a bit. That’s because the capital gains rate is expected to go up in 2013 as are the overall tax rates, that means your losses (if you have them) would be more valuable to you under next years tax rates than they would under this years rates.

Sounds easy enough right? Oh, if it were only that easy......

There’s actually a continuum of options: 

  • lower bracket tax payers who enjoy a zero percent capital gains rate this year want all the gains they can get. Next year they’re rate increases on capital gains exponentially
  • middle bracket tax payers, those in the 28% bracket want to take their gains too with this caveat, the best candidates for tax planning this year are middle bracket taxpayers who have little to no carryover losses from previous years. That’s because you MUST take your losses if you have them (which you’d be taking at a lower tax rate and you don’t want to do that) against your gains
  • high bracket tax payers likely too want to take their gains because their capital gains tax rates are lower this year than they’ll be next year but again, that makes sense only if they don’t have carryover losses from previous years for the same reason as noted above for middle bracket taxpayers

Bottom line is that you need to have the details of your personal situation on hand in advance to aid in your decision making, here’s what we recommend; 

  1. Know you gain and loss positions by early December and evaulate what can “go” and what can “stay” 
  2. Contact your accountant or tax preparer and ask them what amount of carryover losses you had when your return was completed last year
  3. Ask your accountant or tax preparer what your marginal tax bracket was last year and what they think that it’ll be this year and if you’re in the lowest brackets
  4. By Mid-December, finalize a strategy that you’re comfortable implementing to get the biggest tax bang you can

By the way; our Mid-December recommendation isn’t one we pulled out of our hat. Odd are you’ll get interim legislation before the Christmas recess on either new final regulations or the inevitable changes that are slated for change on December 31st. 

Either way, you’ve got to have a strategy ready in time. 

Of course if the rules change before year end, this could have been for naught but better to be safe than sorry. 

If you have any questions, email us by using our Contact form here and we’d be happy to give you our feedback. 

Note: Barry Capital Management clients have this process already being taken care of as part of our Wealth Management program offering. 

"The Optimists Greed"

If you've worked with a stockbroker you're familiar with the phone calls about the next "can't miss" investment. Your optimist mind kicks in and your sense is to "go for it." The rationale behind the investment sounds reasonable and after all, your brokers got access to all that research.

Is it really about making as much as you can, or is it about making what you need?

Is it really about making as much as you can, or is it about making what you need?

Every trade results in your broker making money, the brokerage firm making money and if you're buying mutual funds or insurance products, there's a company in that profit chain too and they make money as well. But what about you, do you make money?

Just like sitting at the black-jack table...sometimes yes and sometimes no.

When we walk into a casino, everything around us tells us that we can win. Even though we know in our hearts that the odds are stacked against us, the thought of winning big overwhelms our decision making. Advertisers, marketers and slick ad agencies understand this and that's why they spin their message to play on our optimist mind. Optimists trade more stocks/gamble more money, create more commissions and transaction costs/lose more money than pessimists do. Many investors have more in common with gamblers than they think; gambling that they can pick the right investments and someday reach their goals.

So the odds are stacked against us from the start.

As if this weren't daunting enough of a task, let's take the next piece of the puzzle.

We'd like to think that the stock market is a free market. That with expertise and information we can make informed decisions that will win the day. Well, it doesn't work exactly like that. Often times, your investment company has figured out how to profit on your investing even if it doesn't make you any money. The sub-prime mortgage debacle was a classic example and surely not the only time that investment companies have been the direct benefactor of their investor's failures. So now we've come to realize that we're not playing the investment game pitted only against the market as we thought. We're playing against the market and our adversaries. Yes, it's true that there are people out there that are betting against you, betting that you'll lose your money. And they're smart, talented and experienced at beating investors out of their money.

What is an investor to do? Is there actually a way to prosper and "win the losers game?"

First thing is to stop gambling and start investing. Develop long-term goals and then tailor a plan to get there. Part of that plan should include an investment policy designed to help you make consistent progress towards your goals by enhancing your decision making not clouding it. Navigating the world of investing for the uninformed may be treacherous, but for the true investment professional armed with unbiased advice the effort is much simpler.

Second, do some research and find out who you can trust. There are investment professionals that are basing their success and reputation on their ability to put your best interets above all others. That's as opposed to investment professionals who have done everything within their power to fight any regulation forcing them to put any interests above their own and why exactly is that do you think?

This sounds like a lot of work and it is..getting it right takes some real effort. In the end, you'll find all your work worth it, the payoff outweighs the work involved to make the right choices.

In conclusion, optimism is a good thing, but don't let yourself be manipulated by your own positive thinking. Hire a professional who can protect you from yourself and your adversaries.