Happy Tax

Sep 11, 2019

By Joanne M. Welker, CFA, Senior Vice President and Manager, Advisory Services

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It is understood that the phrase “Happy Tax” is a bit of an oxymoron, but as an investor that truly is what the capital gains tax is.  Did you make the investment hoping the value would go down?  No.  Are you happy that the value of the investment went up? Yes.  And are you happy that you were able to exit the investment while the price was still elevated?  Yes.  The realization of capital gains is the essence of successful investing and as such should be celebrated, not despised.

That said, it is also understood no one loves paying taxes, so now, with about 3 months to go in the tax year, is a good time to review your portfolio and assess what gains have been realized to date and if there are any current positions where it may make sense to realize some losses.

Also remember if you hold any mutual funds in your portfolio, there may be a capital gain distribution around year end.  This is when a mutual fund distributes its long-term capital gains.  When shareholders receive a capital gain distribution from a mutual fund, shareholders are taxed at long-term capital gains rates.  This is true even if the investor held shares for less than one year.   If taxpayers hold the mutual funds in taxable accounts, they are required to pay tax on these distributions whether the distributions are paid in cash or reinvested.  If the fund realizes and distributes short-term capital gains, these are not reported as capital gains.  Instead, they are usually recharacterized as non-qualified ordinary dividends.   Even though the market this year has been extremely volatile, it is up from January 2, 2019, so don’t be surprised if there are capital gain distributions and don’t be upset – the mutual fund’s portfolio manager’s job is to make good investments.

Some final things to keep top of mind:

Your Financial Advisor can help with some tax planning, but a Tax Advisor should be consulted for full tax planning strategies.

Do not let tax considerations be “the tail that wags the dog.”  It may be better to pay the capital gains tax versus watching the value of the asset go down because you didn’t want to sell it and realize the gain.

And remember — it is a happy tax!