Year-end tax plan­ning for share­hold­ers of in­di­vid­ual stocks and bonds

The Saratogian (Saratoga, NY) - - BUSINESS - By Den­nis and Aaron Fa­gan

This ar­ti­cle is the first of a three part se­ries ap­pear­ing in The Record, The Sarato­gian and Com­mu­nity News that per­tains to year-end fi­nan­cial plan­ning.

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. It is es­pe­cially im­por­tant this year due to the po­ten­tial for tax re­form. Given the length of this bull mar­ket many in­vestors may not have any losses in their port­fo­lios. 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 fil­ing jointly with tax­able in­come of $78,750 or less; at fif­teen per­cent for those with tax­able in­come be­tween $78,751 and $488,850 and at 20% for those for­tu­nate enough to have tax­able in­comes above $488,850. Short­term 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 short­term 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!

Fi­nally, keep in mind that both short- as well as long-term cap­i­tal gains paid within a non-qual­i­fied ac­count, even if rein­vested, are tax­able. The In­ter­nal Rev­enue Service (IRS) has de­ter­mined that re­gard­less of whether you phys­i­cally re­ceive the dis­tri­bu­tion or rein­vest it, given the fact that you could have taken it, a term known as con­struc­tive re­ceipt, the dis­tri­bu­tion is there­fore tax­able.

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.

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