Taxes Coming? Take a Deep Breath and Do Nothing for Now

NEW YORK ( TheStreet) -- With the election over the only thing we are waiting for is the fat lady to sing on new taxes.

It seems all but inevitable taxes will go up. Of course, at this moment the particulars of any new taxes are not known. They can only be imagined.

Despite this, there's been a lot of news and punditry about what investors should do. Two popular pieces of advice are: 1) take your gains now because your capital gains taxes will be higher in the future and 2) sell your dividend stocks now because higher new tax rates on dividends are going to put significant downward pressure on these stocks.

My advice is: Take a deep breath and don't do a thing. At least for now. I feel investors will be better served to think through the myriad of options and possibilities with respect to taxes and investments.
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First, I want to provide one overall principle to guide your thinking: Taxes should never drive investment decisions, they should only influence them. This nugget gives entry to what the other possibilities are.

With respect to selling stock now to take the capital gains hit at what many expect will be a lower capital gains tax rate, the first point to consider is whether or not it's a good investment. I've held some stocks for more than 20 years, which means they saw the Bush tax cuts coming, and presumably, going. If it's a growth stock without much in the way of dividends, the principal you end up with in five or 10 years could far outweigh a tax differential.

What may make more sense than selling your winners is to sell your losers instead. Remember, if tax rates are going up, the value of your loss carry-forward is going up, too. If you take a loss now, you can throw it against gains that you might take in 2013 and 2014.

Remember, if you take a $10,000 loss you realized and did not use in 2012 and throw it against a $10,000 gain that you realize in 2013 or 2014, whether or not taxes rose is somewhat moot with respect to those two investments.

Further, I feel that pruning your losing investments is oftentimes a more productive exercise than trimming your winners. Why? Because investors tend to hold onto losers longer than they should, many times for emotional reasons, and realize even larger losses when all is said and done.

Getting rid of losers takes more discipline than selling winners, and the occasion of higher taxes may be the motivation needed to do what you should already be doing.

Finally, selling your losers offers a bit of a hedge during this period of uncertainty. For instance, let's say you sell your winners, take your lumps, and pay your (albeit lower) taxes in 2012. If the capital gains rate doesn't go up, or go up materially, you've traded out of a winning position and incurred an unnecessary tax bill. Selling your losers, on the other hand, doesn't provoke any tax liabilities and should rates go up, these losses will have more value in 2013 and beyond, if and when you use them.

With respect to dividend-paying stocks, the argument for sitting still may be even stronger.

Specifically, even if you do sell good dividend payers, where are you going to go? Let's say the equity portion of your portfolio consists entirely of the S&P 500, which is currently yielding about 2.2%. If you sell in anticipation of taxes on dividends growing from the current 15% rates to the anticipated ordinary income tax rates, what can you possibly do with the proceeds from the sale that is going to be dramatically better or different, in an environment when 10-year Treasuries are yielding about 1.6%?

Or let's say you have a large position in AT&T ( T) or Verizon ( VZ), which are yielding 5.3% and 4.8%, respectively, and that you enjoy the income they provide. These stocks have, on a relative basis, had a decent run over the past year.

Suppose the pundits are correct, and dividend-paying stocks take it on the chin as higher taxes become the reality. Should the shares dip, this will have an impact on the value of your portfolio, but absolutely no impact on your earnings. In fact, should these two companies keep doing what they have been doing for the past 10 years, holding onto them most likely means that your income is going to increase, not decrease.

I've always held that good investing relies on facts rather than supposition. Accordingly, in all but the most extreme cases, I would advise investors to sit still for the moment. It may be far more productive to contemplate the best way to shift your assets into tax- deferred accounts than worrying about what to sell. Then, when the facts about tax rates finally present themselves, you'll be in the best possible position to intelligently act on them.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.