The Taxman

One off shoot of success in the stock market is higher taxes. I have been trying to manage my selling to have more long term gains versus short term gains. I was wondering today about selling GTAT, which is up 26% for me in under two months. But I do not want to pay 40% of that to IRS.

Using my secret multiplier, here are my year to date realized gains:

Short term:  64,521
Long Term: 93,896
Dividends: 19,968

If you apply my marginal state and federal tax rates against those amounts, I will owe 45,000 in taxes on those gains/dividends. I will have to look and see if I have any carry forward losses from prior years to ease that pain.  I just checked. Only about $2,000.

So I suppose I answered my own question about GTAT.  I have to find a way to really try and hold these positions for at least a year.

The tax issue and compounding impact is really important but rarely discussed on dividend stocks. Think about Intel, which I have held since September 2010. It is currently yielding 3.6% for me. In dollars that is $656 a year. If I sold them today, I would pay taxes on a gain of 6.10 a share. Say that is 18% when considering state and federal taxes. That is $1.10 a share. Then if I bought another stock just like Intel with my after tax proceeds, my annual dividend would be $627 (instead of $656), due to the loss of capital via taxes. That is a 4.5% drop in investment income. I know it does not sound like much, but that adds up over an entire portfolio and multiple years. And if the sale was on a short term gain in this example, my annual dividend would have dropped to $588, which is a smidgen mor than 10%.

I know taxes are boring and inevitable. But it does make sense to try and minimize them, when practical.  While this is a reasonable illustrative example, everyone should do their own math as results can differ a lot depending on tax bracket and the actual capital gain on the stock (in this one example, the INTC purchase is up 32%.).