Do a Year-End Tax Review of your investments
If you’re not meeting your financial goals for the year, there’s still time to make changes. Make sure your portfolio is appropriately balanced among stocks, bonds, and other investments. Keep it well diversified, without too much at risk in any one sector. And you’ll want to weed out investments with poor future prospects
As you identify investments to buy and sell, keep the following tax implications in mind:
- When you sell assets, you’ll have a capital gain or loss. Remember that capital gains on assets held for more than 12 months enjoy lower tax rates. For shorter holding periods, you’ll pay tax at ordinary income rates.
- Don’t forget to include any reinvested dividends when you calculate your cost basis for mutual fund shares.
- Watch out for the “wash sale rule.” If you sell stock and then reacquire substantially identical securities within 30 days of a sale, you can’t deduct a loss from the sale
- Not all dividends on stocks and mutual funds are taxed at the same rate. “Qualified” dividends paid by most U.S. and some foreign companies enjoy lower rates of 5% or 15%, depending on your tax bracket.
- Beginning in January 2008, the tax rate on certain dividend income and long-term capital gains goes from 5% to 0% for taxpayers in the bottom two regular tax brackets (10% and 15%). There may be strategies you should consider to take advantage of this rate change, such as timing investment sales or deductible expenses.
- Interest payments on corporate and U.S. bonds are generally taxed as ordinary income.
- Income on most state and municipal bonds is usually tax-free. The financial benefit of owning tax-free bonds depends on your tax bracket, among other factors.
- Changing investments within a tax-sheltered retirement account doesn’t have any immediate tax consequences. You’ll pay tax at ordinary income rates when you take distributions
Remember, taxes shouldn’t drive your investment decisions, but they are an important factor to consider. For guidance with the tax issues in your investment review, give us a call.
Written by Ben Lawler, CPA
CEO & President of ProActive Advisors, Inc.