Whether you’re a risk-taking day trader or a buy-and-hold traditionalist, making some savvy moves with your investment portfolio before the year is over can cut your 2013 tax bill. Here are some strategies to consider:
- Take losses. If you own stocks, bonds, or mutual funds that are underwater, consider selling them before Dec. 31. You’ll generate capital losses that can be used to offset any capital gains you realized in 2013. If you accumulate more net losses than gains, you can deduct up to $3,000 of them from your ordinary income each year. If you’re in the 28 percent bracket, a $3,000 loss will trim your Federal tax bill by $840. Excess net losses can be carried forward indefinitely to offset capital gains or ordinary income in future years. Note that the gains you can offset aren’t limited to profits you’ve made by selling securities. Long-term capital-gains distributions from mutual funds can also count.
- Reinvest with care. When taking capital losses, be aware of the “wash sale” rules, which might invalidate your loss if you replace your holdings within 30 days of the sale. Say you take a loss on a real-estate fund you bought at the sector’s peak. If you think the fund will rebound and you buy it back within 30 days, your loss won’t count. But you can buy it back after 31 days or invest in a different real-estate fund at any time. As long as the funds are not substantially identical, you won’t have a wash sale, but you’ll stay invested in that sector.
- Mind your mutual-fund trades. If you’re going to buy fund shares in December, wait until after the fund makes its capital-gains distribution for the year. If you buy before the distribution date, you’ll simply get some of your own money back as a distribution—and you’ll owe tax on that return of your own capital. If you’re selling a fund for a long-term gain in December, do so before its ex-dividend date, the day on which the capital-gains distribution is deducted from the fund’s net-asset value per share. If you wait, some of the distribution you receive may be a short-term capital gain, taxed at higher rates. By selling before, most or all of your profit will be a favorably taxed long-term capital gain.
—Donald Jay Korn
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