Hi Everyone,

The law that sets the long-term capital gain rate at 15% expires at the end of 2010.  Assuming no new laws are passed by Congress, the long-term capital gain rate will increase to 20% the way it was earlier this decade.  Looking at this, it will give us a little more than one year to lock in the 15%.

I think this way of thinking might be misplaced and we could potentially have a change in 2010 already.  Our government is desperate for more additional tax revenues, and President Obama has mentioned that he would favor a higher long-term capital gains rate.  What do you need to consider?

• Will the government change the law in 2010 already?  If so, will they do it retroactively to January 1^st, 2010?  It happened before, the last time in 1993 under President Clinton.
• If the above scenario comes to fruition, you will not be able to act and lock in your long-term capital gain before it is too late.
• What will the new long-term capital gain rate be?  20%, 25% or even more?
• What will the economic ramification be of an increased long-term capital gain rate?  How will the stock market react?

I think the last point is very important, as it will not just affect the taxes owed, but also the overall health of the portfolio.  Considering the actions of our government over the past 10 months or so, I am not sure if they are too concerned about that.

In addition to the long-term capital gain rates, the tax rate on qualified dividend will likely also change.  That rate is currently the same as long-term capital gain, i.e. 15%.  Prior to the tax law changes earlier this decade, the rate was the same as ordinary income, i.e. potentially more than 30%.  A question to ask here is what effects will that have on dividend paying stocks?

This affects you also if you are in a lower bracket, as for people in the 15% tax bracket pay only 10% on their long-term capital gain and dividends.  This is certainly no encouragement to savings and investments for anybody, and that is desperately needed.

An interesting fact is that when capital gain rates were slashed, and that happened already once under President Clinton before the additional cuts under President Bush, the revenue from capital gain to the treasury actually increased, even though the rates were lower.  People decided to cash in their holdings and reinvest or spend some of the money, which helped economic growth each time it was tried.

As always, please feel free to comment.

Patrick