With the S&P 500 up more than 14% in the first five months of 2013, I think that this is a perfect time to do some investment portfolio tax planning for the year. Even if I am not ready to sell shares, I know that developing strategies now to minimize capital gains taxes could save me money later on (and help me to avoid costly mistakes). Here are four money-saving tax strategies I will be considering.
Taking Losses to Offset Gains
With the stock market on fire, it may seem unlikely that investors would have much in the way of losses but, in fact, not every sector has participated in the market's rise. For example, gold stocks, as a group, have been laggards as a result of a 17% decline in gold prices year to date through May 31. Losses on sales of gold stocks could be used, dollar for dollar, to offset gains realized on other stock sales and to reduce capital gains taxes.
While I would like to take advantage of losses on some gold shares, I also may want some exposure to this group long term. In that case, I would be careful not to run afoul of the "wash sale" rule. According to the IRS, a wash sale is one in which an investor sells shares at a loss and, within 30 days before or after the sale, purchases the same or substantially identical shares. In that case, the loss is disallowed for current tax purposes and, instead, increases the cost basis of the new shares. The effect of this treatment is to defer the tax benefit of the loss until the new shares are sold. For more details on wash sales go to http://www.irs.gov/publications/p17.
Donating Appreciated Stock
One tax-saving investment strategy I have used in the past is to donate appreciated stock to one of my favorite charities. The benefit of donating stock is that the full market value of the shares are tax deductible resulting in a larger donation than if I sold the stock, booked the capital gain (and paid capital gains taxes on it) and then donated the proceeds (net of taxes) to the charity. Thus, donating stock can be a win for me and for the organization receiving it.
Choosing the Correct Shares to Sell
If I plan to sell only a portion of my shares in a particular company and I have purchased shares at different prices, I will be selective in which shares I sell. For example, suppose I own 200 shares of Company X's stock, 100 shares purchased at $10 per share and 100 shares purchased at $15 per share, and the stock is now trading at $20 per share. If I only want to sell 100 shares, I can choose to sell the $10 per share stock and book a capital gain of $1,000 or the $15 per share stock and book a capital gain of $500. Thus, if my goal is to minimize my capital gain this year, I would notify my investment firm at the time of the sale that I want to sell the $15 per share stock.
Selling Long-Term Holdings
The maximum federal tax rate on stock held long term (more than a year) currently is 20% (although it can be as low as 0% for taxpayers in the two lowest tax brackets) whereas on stock held short term it is the taxpayer's ordinary income tax rate or as high as 39.6%. Therefore, I will keep more of my profits if I am careful to book long-term rather than short-term capital gains.
*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
- capital gains taxes