Consider Year-End Tax Strageties NOW!
November 16, 2008 – 4:59 pmI’m made dozens of mistakes learning to invest, and I’m probably not done yet. 
As the year draws towards the end and Thanksgiving is getting close, I’d like you to consider taking care of your 2008 tax planning strategies a bit early. There are two things I would like to point out that people either don’t know or don’t utilize when it comes to investing.
Consider Executing Your Tax-Loss Selling Now
Unless you started investing today, you’ve undoubted lost some money on some of your investments. I’ve lost money on most of my investments, and I’m not alone. Please note that I am not a financial adviser or tax adviser, so please consider all of the consequences and make your own decisions. What I am suggesting, however, is that it may make sense to sell some or all of specific investments in order to harvest tax losses.
For example, if you bought a large company value fund that has gone down in value, consider selling that fund and immediately buy a different fund that invests in similar securities. There is a rule called the “wash sale rule” that prevents people from claiming a tax loss on a security if they buy the same security within 30 days before or after the sale. What this means is that in order to utilize your investment losses you need to sell them and not repurchase identical securities for at least 31 days (before or after the date of the sale). You can buy different securities though, meaning you don’t need to sell your securities and be out of the market for a month just to use a tax-loss.
Beware That Capital Gains Distributions Are Coming
If you invest through mutual funds AND you have investments in taxable accounts please be aware that capital gains distributions are coming. Most funds distribute their capital gains in December, but some funds complete these distributions in November or earlier.
The one thing that will make this year even more fun is receiving a huge taxable capital gains distribution from investments that went way down in value. If you’re invested in tax-efficient and/or low-turnover mutual funds than hopefully your distributions will be minimal. A lot of investors, however, holds funds that are either high turnover or are actively managed and therefore may be headed towards a huge taxable distribution. Hopefully some of this distribution will be a “long-term” distribution, but some or most of it may not.
So what can you do? Below are a few recommendations. One again note that I am not a financial adviser or tax adviser, so please consider all of the consequences and make your own decisions. You might also consider working with your financial planner or accountant before making any shifts in your investment philosophy. The list below contains things that I am considering based on my own situation only:
- if you made new investments during the year that are down dramatically, consider selling those investments and investing the proceeds (preferable immediately) into a different but similar fund. That way your asset allocation remains intact, you’re not out of the market, and yet you can still use the losses to offset other gains an/or a limited amount of income on your tax returns (potentially).
- if you’ve held your investment shares for quite some time and are willing to take the tax hit, you could consider selling your shares before the effective date of the year-end distribution so that you don’t get hit with any short-term capital gains. Your mutual fund family should publish the distribution dates for its funds on it’s website in advance of the distribution. If you still have quite a bit of gains, however, it may not be wise to sell out of your fund and take a bit tax hit just to avoid a capital gains distribution.
Rebalance Your Portfolio
If you have rebalancing to do, consider how you could offset gains with losses to minimize your taxes. Now may be a great time to rebalance.
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4 Responses to “Consider Year-End Tax Strageties NOW!”
There will be lots of tax loss selling in late December, including from me.
By doubleourmoney on Nov 16, 2008
I’m a little bit fuzzy about the little details when it comes to short-selling. I don’t believe you can buy a very similar company (ex: sell Chevron at a loss and buy Exxon to stay exposed to the oil producers), but I’m not quite sure. Do you know where the line is drawn?
By Blake on Nov 17, 2008
Never been one to ponder over taxes. Anyway, my portfolio is in deficit and expenses is overwhelming compared to income. So not really in the mood for any tax strategies.
By Associate Money on Nov 18, 2008