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Sell investments before 2013?

By Judy Martel · Bankrate.com
Wednesday, October 24, 2012
Posted: 6 am ET

The fiscal cliff -- when taxes are set to rise on income, estates and investments -- is looming, but even if Congress acts to avoid it before the end of the year, plenty of advisers believe some taxes will rise in the next few years in response to a ballooning federal deficit. It's just unclear which ones.

So should investors sell assets this year in preparation for potentially higher investment taxes in 2013? It depends, says Barry Taylor, CFP professional at Integral Financial Solutions in San Francisco, Calif.

There's no right decision for everyone, he says. "We believe tax rates should be a factor in making investment decisions, but not the primary factor." Investors earning lower income are subject to lower tax brackets, for instance, and could end up paying more in transaction costs to sell an equity position than they save in taxes, he says.

However, wealthier investors are right to be concerned about the possibility of rising taxes. Unless Congress acts, long-term capital gains rates will increase next year to 20 percent from 15 percent, plus an additional 3.8 percent surtax for high-income earners as part of the 2010 health care law.

Under the right circumstances, Taylor says, it makes sense to take advantage of opportunities to save taxes now. "If we plan to rebalance the portfolio or raise cash within the next 12 months, for example, then I am advising clients to make the trades before the end of the year to take advantage of the potentially lower tax rates this year."

There's always uncertainty in the market, so Taylor advises investors not to react to market or economic conditions too quickly. "Investors need to take a long-term view and recognize that the market will continue to be volatile for another year or two and be affected by the uncertainty of spending limits, fiscal cliffs, employment, housing and international economies," he says. "We believe building well-diversified portfolios is the best strategy to manage the market uncertainty over the long term."

Are you planning to hold tight on your investments in the face of potentially higher taxes next year?

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