My F&M

Year-End Uncertainty

Share This Article

In our recent appraisal letter, we wrote that “there is significant uncertainty about capital gains rates next year and whether we should accelerate gains in taxable accounts, but that topic will be addressed in a future communication.”

Tax policy uncertainty continues to be about as high as we can remember.  As it now stands, income taxes for many clients are set to increase materially in January.  Capital gains taxes are set to rise.  Taxes on dividends may nearly triple for many.  And a 3.8% Medicare tax that applies to interest, dividends and capital gains for high income earners is also slated to begin!  Several potential portfolio actions may be in order, including evaluating the benefit of accelerating some capital gains into this tax year.

However, at the same time, the “fiscal cliff” looms, and most economists expect that the combination of tax increases and “sequestered” spending would tip our slow recovery into an actual recession.  Deficit reduction is essential, but neither party wants to embrace it so rapidly that it sinks the economy – that would actually increase deficits rather than reduce them.  If Congress does in fact address the problem of the “fiscal cliff”, depending on how they “fix” it, that might result in many of these tax increases being deferred or eliminated (for some or all of our clients). 

So, at this point, we just don’t know.  And that uncertainty may continue until quite late in the year.  All we can say is that political decisions are highly likely to affect the tax treatment of your portfolios in material ways next year.  We’re monitoring this closely and will contact you if we want to recommend any actions that might result in unusual capital gains this year.

Regardless, please note that each client’s situation is unique: some have mostly tax-deferred holdings, some have substantial capital loss carry-forwards, some are making substantial periodic distributions and others have already taken substantial capital gains this year.  For this reason we won’t be making the same recommendation to each client, independent of tax law changes.  Nevertheless, if you plan to be traveling late in the year and we haven’t already had a discussion about capital gains, please make sure we know how to reach you.