This article is the first in a two-part series focusing on year-end financial planning. The articles will appear in The Record and The Saratogian on consecutive Sundays for the next two weeks.
At the start of the holiday season, trying to offset realized capital gains with capital losses in your portfolio is one of the least time consuming and profitable tasks you can undertake with regards to your investment portfolio. This is particularly important this year because of the potential for tax reform. Given the length of this bull market, many investors may not have losses in their portfolios. Still, it makes sense to examine your gains and losses, both unrealized and realized. Finally, remember that this article only applies to Shares held in non-qualifying taxable accounts (not an IRA or retirement plan). Investors selling these stocks would claim profit or loss as set out in Appendix D of Federal Filing Form 1040.
Please note the following important IRS rule pertaining to capital gains and losses. If, when comparing your realized gain (the securities that were sold or on which the company was bought by another company for cash) to your realized loss, the net result is a loss, only up to $ 3,000 can be deducted from ordinary income. The remaining amount can be carried forward indefinitely.
An additional component to consider before realizing any capital gain or loss in your portfolio is whether the transaction would trigger a long-term or a short-term capital gain / loss. Long-term transactions are defined as those where the underlying security has been held for a year or more and are generally taxed at zero percent for taxpayers who submit along with taxable income of $ 80,800 or less; at 15 percent for those with taxable income between $ 80,801 and $ 501,600; and at 20 percent for those lucky enough to have taxable income above $ 501,600. Short-term transactions where the security was held for less than a year are taxed as ordinary income and are subject to the same tax rate as your wages or dividend income. For most taxpayers, the tax rate is between 25 and 33 percent for the federal government. In either case, long-term and short-term capital gains are taxed as ordinary income for New York state taxpayers.
One final consideration before executing a stock or bond trade for tax purposes would be to determine whether executing that trade would result in a wash sale. A wash sale occurs when the transaction results in a loss and an “essentially identical security” is purchased within thirty days. Should this occur, the tax loss resulting from the sale would not be deductible. Please note that if you profit from the wash sale, the profit is taxable.
Don’t forget that it is always a good idea to consider the impact of selling a stock on your portfolio. Put simply, it is rarely advisable to make a transaction just to save money on your tax return!
Selling or selling appreciation and / or impaired securities is just one tactic that an investor can use in year-end tax planning. Please also note that this decision must be made in conjunction with and with full knowledge of the resulting impact on your other investments, such as mutual funds. Be sure to find out more from your tax advisor before making portfolio transactions at the end of the year!
Finally, keep in mind that both short and long term capital gains paid into an unqualified account are taxable even if reinvested. The Internal Revenue Service (IRS) has determined that whether you physically receive the distribution or reinvest it, the distribution is taxable given the fact that you could have received it.
Please note that all data are for general information purposes only and are not intended as specific recommendations. The opinions of the authors do not constitute a recommendation to buy or sell the stock or bond market or the securities contained therein. Securities involve risks and capital fluctuations occur. Please do a thorough research of any investment before investing or consult your financial advisor. Please note that Fagan Associates, Inc or its affiliates will buy or sell for themselves securities that it recommends to its clients. Consult your financial advisor before making any changes to your portfolio. To contact Fagan Associates please call 518-279-1044.