I wrote a couple of weeks ago about why some basic tax knowledge will not only help you to maximize your tax refund after the fact, but will also serve as good guidance on how one should plan financial activities beforehand. Case on point: my exit strategy on my investment in Apollo Group, Inc. (APOL).
For those of you who don't know, Apollo Group is the operating of University of Phoenix, Inc. (UPX), an accredited university with predominant online presence, and many other educational institutions. I bought 400 shares of its stock at $35.07 apiece on November 20, 2006, following strong recommendation from Morningstar equity research's recommendation. (In retrospect, I bought the stock almost at its 3-year nadir. What a perfect timing!)
Now the stock APOL is trading at over $75 apiece and I'm happily watching my original investment of $14,000 turned out to be another double-bagger. Apparently the stock is no longer cheap at 22 times forward P/E. In fact, in my latest monthly portfolio review, I have listed my target (sale) price of APOL as $65, but I still haven't sold the stock yet. Why?
It is all about tax consequences.
With over $16,000 unrealized capital gain, if I sell today, such gain will be classified as short-term capital gain, and is therefore subject to my tax bracket of 33%. That would mean the $16,000 before tax gain will shrink to $10,720.
On the other hand, since I bought the stock on November 20 of 2006, if I can be patient enough to wait another three weeks, the $16,000 gain, if it is still there, will become long-term capital gain, and I will only have to pay 15% tax and keep $13,600. That's almost a $3,000 difference!
I am usually not timing my sales this way, knowing fully the market can have unexpected and unfavorable developments any time. But this is a classic example where a tax-conscious tax sale may work. That is because:
1) A 20-days wait means $3,000 more to keep for my nest egg
2) APOL's quarterly earning release was out last week, so there is no short-term catalyst for a price correction except for a market-wide sell-off
3) And I won't be worse off anyway unless the stock loses $7.50/share (10%) or more in the next 20 days.
P.S. I bought a lot of Citigroup (C) stock this month albeit the price decline. 5.1% dividend yield is becoming yummy and I'm optimistic that the financial titan will survive the credit market turmoil and becomes stronger (and it will be helped now that Fed is likely to loose the interest rate over time).