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By Jason Stipp | 10-03-2012 03:00 PM

Guideposts in an Uncertain Tax Environment

Investors can do more harm than good when they start reacting to what they think might happen in a period of substantial uncertainty, says Vanguard's Joel Dickson.

Jason Stipp: I'm Jason Stipp for Morningstar.

Investors are facing a very uncertain tax environment with the threat of rising taxes in 2013, but not the certainty of rising taxes in 2013.

So what should investors do? We’re checking in today with Joel Dickson--he's a principal and investment strategist at Vanguard--to get some insights on how investors might think about all of these uncertain taxes that could be coming up. Thanks for joining me, Joel.

Joel Dickson: Thanks for having me, Jason.

Stipp: We do have this uncertain environment. We could have capital gains rates going up in 2013, dividend tax rates going up in 2013. Investors don't want to be hit with these higher tax rates, but they also don't necessarily want to have the tax tail wag the dog. What should we do in an environment where we just don't know?

Dickson: Let me start by saying, while we may not want the tax tail to wag the dog, a happy dog does wag its tail. So we need to think about how you do incorporate tax issues into your overall investment program.

In many ways, the situation that we are facing right now, and this being October 2012, is not that different from where we were exactly two years ago, because many of the exact same tax rates that are scheduled to rise at the beginning of 2013 were scheduled to rise at the beginning of 2011.

Ultimately, they did not, given some last-minute extensions that were done in the middle of December 2010. And the important part of that is, the lesson that people learned is, if you started reacting to what you think might happen in a period of substantial uncertainty, you may have done yourself more harm than good by trying to anticipate it.

The nice thing with these tax changes, if you will, is that, we'll have a lot more information come December and maybe even after that. And so you don't need to react now. It is something where, if it's capital gains, if it's dividends, and so forth, those are decisions that can be made closer to the end of the year when we have additional information.

Stipp: We have heard from some of our readers that they’re thinking about tax gain harvesting. So you often think about tax loss harvesting around this time of year. But in this case, they would go ahead and take a gain on something that's appreciated, pay what they hope will be lower rates in anticipation that those rates might go higher next year. And in fact they might buy that security back if they still wanted to have that exposure. What do you think of that as a strategy if you are just convinced that these rates are going go up?

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