Long-Term Investigating: The Tax Advantage

The Calculation
The reduction of the long-term capital gains tax rate to 15 percent on a 12-month or longer holding period gives high tax-bracket investors the opportunity to significantly reduce their tax penalty. If you’re in the 35 perecent tax bracket, and your $100,000 investment of taxable dollars returns 10 percent, producing a $10,000 gain, your tax liability could be:

•    Taxed as ordinary income at 35 percent resulting in $3,500 in taxes if sold in a period of 12 months or shorter
•    Taxed at 15 percent capital gains tax rate resulting in $1,500 in taxes if sold in a period of 12 months or longer

For investors who hold investments for 12 months or longer, the 15 percent capital gains tax rate can reduce the amount of gain lost to federal taxes by 20 percent versus the highest ordinary income tax rate. This differential is based solely on taking full advantage of the lower capital gains rate. It’s an opportunity for savings that not enough investors consider.
It’s an opportunity that, I believe, indicates the need for a careful review of the investments you use for your taxable dollars. For the past decade or so, enormous amounts of capital have flowed into mutual funds. These investment vehicles may now be less attractive for some taxable investors, because they may not enable you to manage your investments as well in terms of minimizing taxes.
Many mutual fund managers employ active, short-term trading in pursuit of total return. This approach will often deny tax-affected investors the benefit of the lower capital gains tax rate, and could expose some of their return to federal income tax rates up to nearly 35 percent or higher internal mutual fund costs which will deplete a gain before it is realized.

The Alternative
In this environment, individually managed accounts should be considered for investing taxable assets. Although this investment alternative, like most others, carries a degree of risk that may vary from portfolio to portfolio, it enables you to retain the benefits of professional management. This type of investment also offers a degree of control over the timing of buy/sell decisions that can help you keep more of any gains you realize. The fees associated with individually managed accounts can be highly competitive with the costs of mutual fund investing and will have an impact on the overall performance and return potential of the portfolio. For your taxable assets, the individually managed account combines tax-sensitivity, professional management and customization, an attractive combination. Keep in mind, individually, tax-sensitive managed portfolios are not suitable for all investors. Let your professional tax adviser and financial adviser help you figure it out.


Tom Small is a financial and estate planning specialist with PensionTrend Investment Advisors, LLC in Okemos.  He has more than 15 years of experience and specializes in retirement and estate planning strategies for high net worth individuals.  Small is a Registered Representative of Cambridge Investment Research, Inc., a Registered Broker-Dealer, Member NASD & SIPC.  PensionTrend and Cambridge are not affiliated.








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