Our Year-end Money Moves series, circa 2009, continues today with a look at some investment-related actions that you might want to consider by Dec. 31.
As mentioned when we started this series, several of the investment moves also have tax considerations.
For most investors, long-term capital gains (profits made on the sale of assets held for more than a year) and qualifying dividends are taxed at 15 percent, versus the potential top tax rate of 35 percent levied on wage income.
For filers in the 10 and 15 percent brackets, the long-term capital gains rate is zero.
But these lower rates are scheduled to end in 2011. And some fear that the rates might be hiked earlier in an effort to offset the growing U.S. deficit.
If this is a concern for you, it might be time to take earnings this year and lock in the low capital gains treatment.
Rebalance and diversify
Making the choice to sell an asset could become clearer when you assess your assets and determine whether some changes are appropriate. Does your portfolio still meet your financial goals and objectives? Have your personal circumstances changed enough to warrant reallocation of your investments? Are your holdings sufficiently diverse?
In most cases, portfolio moves should be made to spread your money among different investments and asset types to reduce risk, since different sectors perform well under different market conditions. The goal is to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
But before you go selling and buying a bunch of different stocks, consider the wash sale rule. This law prohibits you from claiming a loss on the sale of a stock if you buy substantially identical shares either 30 days before or 30 days after the transaction.
Sell losers to offset winners
Although the market has improved of late, most of us probably will be able to find some losers in our portfolios. Those holdings could pay off at tax time. If you do have some gains, you can use your losses to offset them. And if you have more losses than gains, you can use your excess bad investment results to offset up to $3,000 in ordinary income.
Account for mutual fund payouts
If your mutual fund pays distributions, be prepared to pay tax on these earnings.Often referred to as capital gains distributions, this is your portion of money made when the fund's manager sold assets throughout the year.
Unfortunately, you have no control over these sales and the resulting taxable income it produces. But you can prepare for it. You'll get official word of the tax damage you could face when you get your annual account statement in January, but call your broker or fund company now to get an idea of what you might be facing. If it's enough to produce a substantial tax bill, account for that in the estimated tax payment due in January.
Don't buy too soon
Speaking of mutual funds, if your portfolio rebalancing includes adding a fund or two, don't buy until after the fund makes its year-end payout. If your purchase is just before the distribution date, you'll also be buying yourself a tax bill on your new fund's payout.
Keep an eye on the kiddie tax
A great way to help kids understand investing is to get them some stocks in their own names. But in these cases, parents need to pay attention to the "kiddie tax." This law was created to keep parents from shifting assets to their children in order to take advantage of the child's lower rates.
In 2009, the kiddie tax applies to children younger than 19 and who have asset earnings of more than $1,900. Also caught in the kiddie tax net are full-time students younger than age 24.
Although Don't Mess With Taxes focuses on tax moves, when it comes to investments remember that taxes are just one part. Even if you could see some tax benefits by selling an asset, if it's not a good time to sell or would disrupt your longer-term investment goals, then don't sell just to save a few tax dollars.
And always keep in mind your risk tolerance, desired asset allocation and whether an investment makes sense for your financial and personal situation.Related posts:
- 2009 Year-end Money Moves: Taxes
- Coping with the tax cost of mutual funds
- The 12 Tax Tips of Christmas: #1 Sell Assets
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