As Fiscal Cliff Nears: To Sell or Not to Sell?

As 2012 comes to a close, and the Mayan calendar crowd snuggles deep into their shelters, the issue of the fiscal cliff hits us squarely in the face. To sell or not to sell? That is the question.  Unfortunately, I don’t think there’s a real definitive answer to this. 

Background

In mid-1993, President Clinton raised taxes, to the chagrin of many, and to make matters worse, made the tax hikes retroactive to the first of the year. I remember being up in arms about this most egregious act. I even believed that his decision might be overturned, though I’m not sure by whom. Today, we have a little over two weeks before the Bush tax cuts expire. Along with this comes an increase in the capital gains rate, the expiration of the payroll tax cut and a brand new 3.8% Obamacare tax. Ouch!

If Congress doesn’t act quickly, taxes will rise, the budget axe will fall, and every taxpaying American will have to ante up as they will be required to pay more.  I said every “taxpaying” American because clearly there are many who do not pay income taxes. So do we sell and capture capital gains at the 2012 rate or risk a higher rate beginning in 2013? Hmmm.

At this point, I am leaning toward selling this year—especially for holdings with a substantial unrealized gains. However, there are a few additional issues to consider on behalf of my clients, including projecting the tax bracket for the client in the next few years and the level of risk that the individual investment carries. 

Issue #1: Projected Tax Bracket

If the client’s projected bracket is expected to decline, for example if they are retiring, you may want to wait. Obviously, there are numerous factors to consider here.

Issue #2: The Risk Versus the Expected Tax