Time is right to look at capital-gains tax

Analysis |

Given the market's recent drop, investors might not be focused on minimizing taxes on capital gains.

But experts note that an election year is a good time to think about the issue, as a new administration could mean changes in tax policy.

Financial adviser Joe Leone of RegentAtlantic Capital says higher taxes are a possibility, so planning is smart.

But the rules are unlikely to change in the short-term, based on current proposals, says Roberton Williams, principal research associate with the nonprofit Tax Policy Center.

If presumed Democratic nominee Barack Obama wins in November, capital-gains taxes will likely rise in 2011 for the highest income brackets, Williams says.

Republican hopeful John McCain has said he plans to extend President Bush's tax cuts, which would keep the top tax rate for long-term capital gains at 15 percent for most people. The cuts are set to expire at the end of 2010.

In 1986, an anticipated change to the long-term gains tax, on investments held for a year or more, resulted in a jump in realized gains to $328 billion from $172 billion the prior year, according to the Congressional Budget Office.

Historically, the market doesn't anticipate changes to the capital-gains rate.

Instead, market performance before and after tax changes reflects economic conditions, says Leuthold Group senior researcher Eric Bjorgen.

The market does tend to gain more after capital-gains tax rates are cut than after tax rates are raised.

"Markets generally are going to do better in the wake of such stimulus measures," he says.