As we approach year end, it may be beneficial to take that dreaded look at your portfolio and re-assess some of your long positions. You could have some investment tax savings opportunities that you were previously unaware of.
Your investment portfolio may provide several tax saving opportunities. If you have some unrealized gains this year, you may have an opportunity to sell and lock in the income tax free. Did you have some significant capital losses from stock sales last year? These losses will carry over to the following year until they can be applied against capital gain income. The result is that net gains you have this year, up to the loss carryover amount from previous years, aren’t taxed at all. Of course, you shouldn’t let tax considerations be the sole reason you sell a security.
On the loss side, if you have sold some stocks for a gain and have other stocks that are down, it may pay to sell those stocks to lower your taxable capital gains. If you think the down stock may be a winner in the future, you can sell it and then repurchase it 31 days later. If the expected future gains are industry specific instead of stock specific, you can avoid the 31 day waiting period by purchasing a different stock in the same industry. For example, you could sell Home Depot and purchase Lowes without having to wait 30 days. Capital losses you incur offset your capital gains and up to $3,000 of other income. Any excess loss is carried over to 2010.
Be careful when purchasing a mutual fund late in the year. If it pays a dividend in 2009 after your purchase, you owe tax on the payout this year. But, financially, you aren’t better off because the fund’s share price falls by a corresponding amount. In effect, you are prepaying your tax bill to IRS. To avoid this trap, buy into the fund after the dividend’s record date. The fund can tell you if it expects to pay a dividend.
The last couple years have been tough for many investors. Don’t forget that the best opportunities often arise when we use these situations as an opportunity to grow and learn instead of an excuse to bury our heads in the sand.