Not all Taxes are Bad

I may have lost 80% of my potential readers at the title. Most of us are not ok with the amount of taxes we pay. We often feel like we have zero control over how much the government takes and when they take it. So, the idea that we shouldn’t always recoil at tax time is foreign for most of us.
We know that taxes are withheld from our paychecks – we stare at the significant difference between “gross” and “net” and sometimes feel a little helpless. When April 15 rolls around and the CPA says we owe additional taxes, that helplessness grows to frustration. So, when it comes to the taxes on our investments we want to draw a line in the sand. We should be able to do something to avoid adding to our bill.
Whether you are selling an investment, a business, or some type of property at a profit, or taking funds from an IRA, many transactions have tax consequences. And since many of these transactions are optional - meaning you don’t have to do it - sometimes we focus more on the tax implications than our underlying goals. When this circumstance comes around we find ourselves trapped between investment decisions and tax decisions. We treat them the same or give them equal weight.
Deciding when to sell an investment may be one of the hardest decisions investors face. Buying is almost always surrounded by optimism. Selling is all about finality. Selling defines whether our investment was ultimately a good decision or a bad one – whether we “left money on the table” or “got out at a good time”. Selling is the end of potential.
Deciding to sell is difficult enough on its own. Now add in the consequences of declaring a profit and then giving up some of that hard-earned profit to the tax man… This can paralyze the average person. “Maybe we should wait?”, “Maybe the tax laws will change?”, “Maybe it will go up in price more?”.
My best advice is to keep the two decisions separate. Do not mix investment decisions with tax decisions. I have seen it too many times – valuable investment gains are lost due to an unwillingness to pay the taxes. Once you decide to take your profits, lock that part of the decision in. This doesn’t mean we are oblivious to the tax implications. In fact, I’m a huge fan of minimizing your tax liability.
Once you’ve decided to sell, quickly move on to working with your advisor or CPA to help minimize the impact on your tax bill. This does not minimize the value of tax planning. It does give you a clearer head to make uncluttered decisions about how and when to sell an investment. Not all investment decisions have immediate tax consequences but be ready for the ones that do.
If you find yourself stuck about how or when to sell an investment – let us help.