Just what you need, right? A more time-consuming task that must be looked after between now and the end of the year. But take a little time out from holiday chores to make some strategic saving and investment decisions within 31 December may affect not only your long-term ability to meet your financial goals, but also the taxes you owe next April.
Look at the forest, not just the trees
The first step in your year-end investment planning should be a review of your overall portfolio. This review can tell you whether you need to rebalance. If one type of investment have done well-for example, large-cap shares, it now represents a larger percentage of your portfolio than you originally planned. To rebalance, you sell some of this asset class and use that money to buy other types of investment to bring your overall allocation back to a proper balance. Your overall assessment should also help you determine if this compensation should take place before or after December 31 for tax reasons.
Also, make sure your asset allocation is still appropriate for your time horizon and goals. You may consider to be a bit more aggressive if you do not meet your financial goals or more conservative, if you get closer to retirement. If you want a wider spread, you might consider adding an asset class that tends to react to market conditions is different than your current investments do. Or you can look at an investment that you have avoided previously because of its high rating if it is now selling at an attractive price. Diversification and asset allocation do not guarantee a profit or insure against any loss, obviously, but they are worth reviewing at least once a year.
Know when to hold 'me
when a company is considering a change in your portfolio doing not forget to consider how long you have owned every investment. Assets held a year or less generate short-term capital gains taxed as ordinary income. Depending on your tax bracket, that rate could be as high as 35%, not including state taxes. Long-term capital gains on sale of assets held for more than a year is taxed lower rates: 15% for most investors, 0% (through tax year 2010) for anyone in the two lowest tax brackets. (Long term gains on collectibles are slightly different; they are taxed at 28 %.)
Your holding period can also affect the treatment of qualified dividends that are taxed at the more favorable long-term capital gains rates if you held the stock at least 61 days. (The days must occur within the 121-day period beginning 60 days before the stock's ex-dividend date; preferred shares must be kept for 91 days within a 181-day window.) The low rate also depends on when and whether your shares were detected or optioned during those 61 days. Ask your tax professional to ensure you do not inadvertently incur unnecessary taxes by selling or buying at the wrong time.
Make lemonade from lemons
Now it is time to consider the tax consequences of any capital gains or losses you have experienced in years. Although tax considerations should not be the primary driver of your investment decisions is a step you can take before the end of the year to minimize the tax impact of your investment decisions.
If you realized capital gains by selling securities at a profit (congratulations!) And you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on all or some of these gains. Any losses beyond the amount of your benefits may be used to offset up to $ 3,000 of ordinary income ($ 1,500 for a married person filing separately) or transferred to reduce your tax in the coming years. Seller lose positions to the tax advantage they will give in April next year is a common financial practice known as "harvest your losses."
Example: You sold stock in ABC company this year for $ 2,500 more than you paid when you purchased it four years ago. You decide to sell XYZ stock you bought six years ago because it seems unlikely to regain the $ 20,000 you paid for it. You sell your XYZ shares at a $ 7,000 loss. You offset your $ 2,500 gain, offset $ 3,000 of ordinary income tax this year and continue the remaining $ 1,500 to be used in later tax years.
Time any act correctly
If you sell to harvest losses in a stock or mutual fund and intends to repurchase the same security, be sure to wait at least 31 days before buying it again. Otherwise the trade is considered a "wash sale" and the fiscal deficit will be rejected. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.
If you have an unrealized loss that you want to catch, but still believe in a specific investment, there are a couple of strategies you might think. If you want to sell but do not want to be out of the market for even a short period, you can sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you can double your holdings, then sell your original shares at a loss after 31 days. You will end up the same position but would have caught the fiscal deficit.
If you buy a mutual fund in a taxable account, find out when it will pay dividends or capital gains. Consider postpone your purchase until after that date, which is often near the end of the year. If you buy just before the distribution, you owe taxes this year on that money, even if your own shares have not appreciated. And if you plan to sell a fund yet, you can minimize taxes by selling before the distribution date.
Know where to hold 'me
Think about which investments make sense to hold in a tax-favored account, which may be better for taxable accounts. For example, it is usually not a good idea to keep tax-free investments like municipal bonds in a tax-deferred account (such as a 401 (k), IRA, or SEP). Doing so provides no additional tax benefit to compensate you for tax-free investment 'typically lower returns. Similarly, if you have mutual funds that trade actively and thus generate a lot of short-term capital gains, it may be prudent to keep them in a tax-favored account to defer taxes on the gains that can occur even if the fund itself has a loss. Finally, when deciding where to hold certain investments, keep in mind that distributions from a tax-deferred retirement do not qualify for the lower tax rate on capital gains and dividends.
Be selective about the sale of shares
If you own a stock fund or ETF and decides to unload some shares, you may be able to maximize your tax advantage. For a mutual fund is the most common way to calculate cost basis using the average cost per share. But you can also request that the special shares are sold, for example, they bought at a certain price. Which shares you choose depends on whether you want to book losses to offset gains, or hold gains to a minimum to reduce the tax bite. (This applies only to shares in a taxable account.) Please note that you must use the same method when you sell the remainder of these shares.
Example: You invest regularly in a stock for five years, paying a different price every time. You now want to sell some shares. In order to minimize capital gains tax you will pay them, you can choose to sell less profitable shares, perhaps those who were only slightly lower when purchased. Or if you want losses offset capital gains, you can specify the shares purchased at the current price.
No comments:
Post a Comment