For some clients, he advises they buy hybrid long-term-care policies that combine traditional long-term-care coverage with cash-value life insurance that doubles as a savings and investment vehicle. Typically, these policies allow the policyholder to tap funds for long-term care — and the insurer pays for continuing care when those funds run out. “But it will take a chunk of your resources to pay for it.” He’s growing increasingly fond of his second option: a reverse mortgage known as a home equity conversion mortgage (HECM). They pay interest on the outstanding loan balance only if they sell the home; if they die, the home is sold and the lender is repaid in full. And the line of credit increases with age, so seniors who don’t need long-term care can use the cash for other purposes. (The insurance prevents a couple from being evicted if they tap their line of credit beyond their home’s appraised value.) “It’s not a simple sell,” Gagliardi said. “But if you need long-term care, the money must come from somewhere. If it comes from an insurance policy, maybe you’ll never have to use it. With an HECM, it’ll leave you with more money to use that would otherwise go to pay the insurance company.” More from MarketWatch
The current federal income-tax rates on long-term capital gains recognized by individual taxpayers are still low by historical standards. The rates range from a minimum of 0% to a maximum of 20% depending on your tax bracket. But the rates on short-term gains aren’t so low. They currently range from 15% to 39.6% for most investors. That’s why, as a general rule, you should try hard to satisfy the more-than-one-year holding period requirement for long-term gain treatment before selling winner shares (worth more than you paid for them) held in taxable brokerage firm accounts. That way, the IRS won’t be able to take more than 20% of your profits (or 23.8% if the dreaded 3.8% net investment income tax applies).
However, you may think that today’s somewhat frothy stock market valuations aren’t conducive to making such long-term commitments, even though short-term gains are heavily taxed. What to do? Here are some thoughts on how to rake in short-term gains without getting hosed with much higher taxes.
Sell unlovable losers to create capital losses
Usually I talk about “harvesting” capital losses, by selling loser stocks (worth less than you paid for them), in the context of year-end tax planning. But it works earlier in the year too, like now. Capital losses from selling unlovable losers can be used to shelter short-term gains collected anytime this year. If you have any leftover capital losses at year-end, you can carry them forward to 2018 and use them to shelter short-term gains collected next year and beyond. In other words, to the extent you have capital losses, there’s no need to hang onto winner shares for at least a year and a day in order to pay a lower tax rate.
Consider trading in broad-based stock index options
One popular way to place short-term bets on broad stock market movements is by trading in ETFs like QQQ (which tracks the NASDAQ-100 index) and SPY (which tracks the S&P 500 index). Unfortunately when you sell ETFs for short-term gains, you must pay your regular federal tax rate, which can be as high as 39.6% (or 43.4% if the 3.8% net investment income tax applies). Ditto for short-term gains…