This is the first of a four part series that pertains to year-end financial planning. The articles will appear over the next four weeks in the Sundays editions of “The Record” and “The Saratogian” and include, in order, this article, “Year-End Tax Planning for Shareholders of Mutual Funds; “Year-End Charitable Bequest Planning” and “Investment Portfolio Re-Balancing for the New Year.”
One of the least time consuming and most profitable tasks one can assume during December as it pertains to their investment portfolio is to attempt to offset realized capital gains with capital losses in your portfolio. Thus far, until lately, calendar year 2016 has been a more or less directionless. Indeed many investors may not have any losses in their portfolios as the last bear market ending during the latter part of the first quarter in 2009. That said, it stands to reason that it would be prudent to examine your gains and losses, both unrealized and realized. Finally, keep in mind that this article applies solely to shares of that are held in non-qualified taxable accounts (not an IRA or pension plan). Investors who sell these shares would claim the gain or loss on Schedule D of Federal Filing Form 1040.
Please note the following important IRS regulation that pertains to Capital Gains and Losses. If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income. The balance can be carried forward, indefinitely.
An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss. Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are generally taxed at zero percent for those taxpayers with taxable income of $75,300 or less; at fifteen percent for those with taxable income between $75,300 and $466,950 and at 20% for those fortunate enough to have taxable incomes above $466,950. Please note that these rates are for joint filers. Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income. For most taxpayers, the rate is between twenty-five and thirty-three percent for the Federal Government. In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.
One final consideration prior to executing a stock or bond trade for tax purposes would be to determine if, by executing this trade, a wash sale would result. A wash sale exists when the transaction results in a loss and a “substantially identical security” is purchased within thirty days. If this should occur, the tax loss created by the sale would not be deductible. Please note that should the wash sale result in a gain, the gain is taxable.
As an aside, never forget that it is always prudent to consider the impact of selling a stock upon your portfolio. Simply put, it is seldom wise to make a transaction solely for the purpose of saving money on your tax return!
A sale or sales of appreciating and/or depreciated securities represent only one tactic an investor can deploy when tax planning at year end. Furthermore, please note that this decision must be made in conjunction with and in full knowledge of the resulting impact on your other investments, such as mutual funds. Be certain to check with your tax advisor prior to making any year-end portfolio transactions!
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.