Question: Should I sell stocks in anticipation of a tax increase?

R.T. Greene

Answer:

Dear R.T.,

I think it's too early to put that type of portfolio monitoring into action. But it's a good question because it is a fact that some of the tax cuts put into effect during the current Bush administration could expire. However, they don't expire until January 2011 or after. So the future of the tax situation depends on what the newly elected Congress does. If Congress takes no action, then the cuts simply expire. (Some of these cuts were initially not endorsed by the Democrats because they felt the cuts primarily benefited wealthy Americans.) On the other hand, if Congress wants to extend any or all of the cuts, it will have to vote on the issue.

If the tax cuts expire, here's what you'll see happen:

• The current 10% tax bracket (for the lowest income people) will go to 15%.
  
  
• The current 25% bracket will go to 28%.
  
  
• The 33% bracket will go to 36%.
  
  
• The 35% will go up to 39.6%.

In terms of your brokerage account, the tax on long-term capital gains would go from 15% to 20%. If you own dividend paying stocks which right now are taxed at a maximum of 15%, they would be taxed at the higher income-tax rates listed above.

You're very wise to be aware of the possibility that certain taxes could go up. However, it's quite a long time until that might happen and much could take place on the political scene before then. So I would not change your portfolio holdings right now in anticipation of possible tax increases scheduled to take place in 2011. Instead, I recommend revisiting this issue during the second half of 2010.

Good luck!