Detroit Free Press Susan Tompor column Worried about Obama? Don't sell off your hot stocks yet

Susan Tompor

Aug. 27, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- Should well-off investors sell their money-making stocks this year to avoid paying higher taxes on their capital gains on a hunch that Democratic presidential candidate Sen. Barack Obama could win in November?

Right now, if an investor owns a stock for at least one year and one day, the maximum capital gains tax rate he or she would pay is 15% on the profits from a sale.

GOP candidate Sen. John McCain says he would keep the current top rate.

Obama would favor establishing a higher tax bracket for capital gains and qualified dividends for joint filers making more than $250,000. It would apply to singles making more than $200,000.

The latest reports indicate Obama's proposal would put the top rate at 20% or close to it for long-term capital gains and qualified dividends. Obama also is proposing eliminating the capital gains taxes for small businesses and start-ups. There are no details yet on who would qualify, according to Roberton Williams, principal research associate for the Tax Policy Center, an independent think tank in Washington, D.C.

Lower incomes spared

Fewer than one in seven individuals reported taxable capital gains in 2006, according to the Tax Policy Center.

More than half of the taxpayers with gains had incomes below $75,000. So, many retirees and lower-income taxpayers would not be hit with a higher rate.

Money withdrawn from a 401(k) plan is taxed at ordinary income tax rates.

A limited zero-percent capital gains tax rate is available from 2008 through 2010, as well. The rate applies to individuals in the 10% and 15% tax brackets. That group had paid 5%.

It could add up

Going from a 15% top capital gains rate to a 20% rate might sound like small potatoes, particularly when investors would be thrilled to make money after the brutal action on Wall Street.

Yet, if an investor has a large dollar amount of capital gains, the higher rate could add up to a lot of money, according to Thomas Ochsenschlager, vice president of taxation of the American Institute of Certified Public Accountants.

For longer-term investors, a higher tax rate could mean an extra $1,000 in federal taxes, if you're looking at $20,000 in capital gains.

Most capital gains are reported by high income taxpayers. The Tax Policy Center noted that the 3% of returns with adjusted gross incomes of $200,000 or more in 2006 reported 83% of all capital gains that year.

The threat of higher cap gains rates is hanging over Wall Street.

"The longer the ambiguity, the longer it adds to the volatility in the market," said Brian Belski, chief U.S. sector strategist for Merrill Lynch (NYSE:MER) (OOTC:MERIZ) in New York.

Yet Belski said he would caution investors against making bold moves now. No one knows who will win or what kind of tax measure could pass. Yet, this issue is worth watching.

Mark Luscombe, principal analyst for CCH in Riverwoods, Ill., notes that new presidents tend to address their tax agendas in the first year in office.

Contact SUSAN TOMPOR at 313-222-8876 or stompor@freepress.com.

Newstex ID: KRTB-0048-27700124