Additionally, if the stock was held a year or less, then ordinary income tax rates–instead of the lower capital gains rate–would apply. The good news is that last year‚s tax cut brought down the maximum income tax rate to 35% from 38.6%. On the long end, if you‚ve held the stock for more than five years, you may be eligible for an 8% tax rate.
One aspect of capital gains taxes that has remained constant: the 28% tax rate on profits from collectibles including art, stamps and coin collections.
Also, a 25% rate still applies to the portion of gains that has depreciated on real estate used for business or rental purposes.
Netting rules, for the most part, remain the same this year. In general, if you have more capital losses than gains, you can deduct up to $3,000 of your net losses from other income. As with past years, you want to offset long-term gains and losses, then short-term gains and losses. You just have to do one additional step–separate out post-May 5 and pre-May 6 gains and losses, and then offset each of these groups against one another.
Mixing ETFs And Separate Accounts
Investors with separately managed accounts who want a little more diversification–or a bit less risk–might want to consider adding exchange-traded funds to their portfolios.
Exchange-traded funds, or ETFs, initially were used mostly by large institutional investors. They are gaining traction among financial advisors and retail investors as a useful tool, particularly as a means to round out their investment portfolios or to hedge their bets in case their actively managed assets underperform their benchmarks.
Separately managed accounts, or SMAs, typically require hefty minimum investments of at least $100,000–though they have come down of late. But even at that level, some argue it‚s not possible to get enough diversification. After all, SMAs typically focus on one style–large-capitalization growth stocks, for instance–and they usually house fewer stocks than a traditional mutual fund.
Enter the ETF, which offers "a cost-effective way to deliver a complete asset allocation instead of having to try to meet investment minimums of separate account managers," says Valerie Coradini, director of sales strategy at Barclays Global Investors‚ iShares, its ETF product.
"Advisors might say they want 20% in small caps, but you can put half of that with an active manager and half of that in an (ETF), which is more likely to track the benchmark, where the active manager provides the possibility of excess returns," she adds. "It‚s a way to have one foot on the gas and one foot on the brake."
Using an ETF to complement a separately managed account, or any other investment for that matter, will become easier as investment firms adopt platforms–also known as unified managed accounts–that allow several investment types to reside in the same account. For instance Smith Barney, Citigroup Inc.‚s brokerage arm, rolled out its version of the unified managed account, called Integrated Investment Services, less than six months ago.