Early investment planning can save taxes

March 8, 2011

Capital gain rates will remain at a maximum of 15% (and a minimum of 0%) through December 31, 2012. The rates apply to qualified dividends and long-term gains from investments you sell. That makes 2011 a good time to implement strategies for potential tax savings.

One example: You may be able to manage your income to stay within the 10% or 15% income tax brackets, which would allow you to take advantage of the 0% capital gain rate.

Alternatively, you could gift appreciated stock to family members in those brackets. For 2011, the cutoff for the 15% bracket is $69,000 of taxable income when you’re married filing jointly ($34,500 for singles).

It might be time to “harvest” some of your investment gains in case tax rates rise again in the future. Also a tax-savvy way to completely eliminate your capital gains tax might be to donate appreciated stock to charity and receive a deduction equal to the security’s current market value. Special rules apply to noncash donations, so check with us before you move forward on this strategy.

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New reporting rules may apply to your stock sales

January 7, 2011

Effective this year, new reporting rules could make it easier for you to report the tax consequences of selling a stock. Thanks to a 2008 law, responsibility for establishing your “basis” is being shifted to brokers and other financial institutions. But don’t discard your records just yet; the new rules are being phased in gradually and don’t apply to any securities acquired before 2011.

Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) will be expanded to include the cost or other basis of stock sold during 2011. The form must also report whether the gain or loss on the stock sale is short-term or long-term. The expanded Form 1099-B will be used to report calendar-year 2011 sales and must be filed with the IRS and furnished to investors in early 2012.

The new reporting rules were passed by Congress not only to make it easier for investors to calculate capital gains taxes, but also to make it harder for investors to underreport capital gains.

For details or assistance with the new reporting rules, contact our office.

Leave a Comment » | January 2011 | Tagged: , , , , | Permalink
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Where you hold an investment matters

December 17, 2010

You’ll probably be reviewing your investment portfolio at year-end for tax and rebalancing purposes. As part of your review, check to be certain you are holding your specific investments in the right type of account. Your goal is to hold investments that produce ordinary taxable income in tax-deferred accounts and to hold those that produce tax-free or tax-favored income in your regular taxable accounts.

Consider this situation. If you hold tax-free municipal bonds in a tax-deferred retirement account, you are “sheltering” interest income from taxes that never would be taxed in the first place. Withdrawals from the retirement account will be taxed as ordinary income at ordinary income rates, and that includes interest from the municipal bonds. The result is that normally tax-exempt earnings eventually become subject to income tax.

Another example: Long-term capital gains are taxed at lower rates than interest income. So investments generating interest might be better held in retirement accounts, while investments generating capital gains might be better held in taxable accounts. Remember, withdrawals from retirement accounts (other than Roth IRAs) are taxed at ordinary income rates even if the income comes from long-term capital gains.

Tax-deferred retirement plans should outperform an investment account that is exposed to annual taxation. But if you’re not careful where you hold specific types of investments, you could end up with less rather than more income.

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Act fast if you want to cut your 2010 taxes

December 7, 2010

1. Tax rates are likely to go higher in 2011, so you might benefit from shifting income into 2010 and delaying deductions until 2011. It’s always a matter of personal circumstances, so analyze the two-year results of shifting income and deductions before you do anything.

2. Remember that required minimum distributions from retirement plans are back this year. If you’re over 70½, your 2010 distribution must be taken by December 31 or a 50% penalty may apply. If you turn 70½ this year, you could wait until April 1, 2011, to take your first distribution. In deciding, consider the likelihood of higher tax rates next year and the fact that a delay means you’ll have two taxable distributions for 2011.

3. With the $100,000 income limit dropped for converting a traditional IRA to a Roth, consider doing a conversion before year-end. You can elect to pay the tax over two years’ tax returns, 2011 and 2012, or pay in full on your 2010 return.

4. Consider buying needed equipment for your business to benefit from the first-year $500,000 expensing option and 50% bonus depreciation.

5. If you’re planning to add employees soon, do so before January 1, 2011. If you hire someone who has been unemployed for a while, you might qualify for an exemption from social security payroll taxes on the new hire’s wages. Keep the new worker for at least a year and you could also qualify for a tax credit of up to $1,000.

6. Start a pension plan for your small business. You may be entitled to a credit of up to $500 in each of the plan’s first three years.

7. Review your portfolio and start thinking about offsetting gains and losses for the year. You can deduct $3,000 of losses against ordinary income.

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Tax rules can take some of the sting out of investment losses

November 30, 2010

While losses in your stock portfolio may give you plenty of headaches, the losses may have a tax upside. Consider the following strategies between now and the end of the year to restructure your portfolio in a tax-efficient manner.

Taxpayers are allowed to offset capital gains (such as from the sale of stocks) with capital losses. If capital losses exceed capital gains for the year, up to $3,000 of losses can be deducted from other income, such as wages. Any loss greater than that can be carried forward to future years. It’s important to remember that stocks you’ve owned for more than one year (called long-term) must be grouped together for purposes of calculating the capital gain or loss. The same is true for stocks held for one year or less (short-term).

Here’s the strategy. When you identify stocks in your portfolio that have lost value and are no longer worth holding, consider selling those securities and offset all but $3,000 of the loss by also selling stocks that have gained value. This is known as “tax loss harvesting,” and it can be an effective method for rebalancing your portfolio without paying capital gains taxes.

You can often manage the size of your gain or loss when you decide to sell some, but not all, of a particular stock or mutual fund. To do this, you must have kept good records of the date and the price for each block of shares purchased. By selling the highest cost shares first, you’ll minimize your taxable gain or maximize your loss. You must specify the particular shares you are selling at the time you sell.

On the other hand, you may see the current market as a buying opportunity. If you are considering an investment in mutual funds, pay special attention to the fund’s proposed date for capital gains distributions. Mutual funds generally distribute all capital gains to investors toward the end of the year.

If you purchase a mutual fund just before a distribution date, you will receive the distribution and be required to include it in your taxable income. Since the price of the fund shares before and after a dividend distribution reflect the amount of the dividend, you are actually paying income tax on part of your own purchase price. To avoid this outcome, call the fund and ask for the ex-dividend date and the estimated payout, and make your purchase after that date.

For assistance with the year-end tax planning connected with your investments, give our office a call.

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Evaluate risk in your investments

September 24, 2010

If nothing else, the recent financial meltdown provided an important learning experience and reinforced time-tested concepts about risk in investing. None of these lessons will comfort investors. However, we can still evaluate investment risks, at least on a relative scale. 

Conservative investors fear loss of principal above all. They flock to lower-risk vehicles, such as Treasury bonds, CDs, and money market funds, which are comparatively well known and easy to understand. They’re willing to accept a lower ceiling on their potential earnings in exchange for a lower risk of losing principal. However, this reasoning ignores or underrates a different but no less serious risk: that inflation will outstrip the earning power of the investor’s savings, causing the principal to lose value even when achieving its maximum rate of return. In the worst case, conservative investors can outlive their investments.

Aggressive investors have no problem with risky investments if the investments carry a high profit potential. The more rational risk-takers recognize a corresponding loss potential and accordingly risk no more principal than they can afford to lose. Less rational people may continue to risk everything until little or nothing remains.

The wisest investors take a balanced approach. Since most have neither the time nor the resources to analyze individual investments in depth, they generally refer to advice and analysis provided by outside sources. They also diversify their holdings so that if one investment fails, their portfolios are not irreparably damaged.

The mix of assets in your own portfolio should reflect your risk tolerance, but it also should be tempered by an awareness that both extreme caution and excessive risk-taking can be pathways to ruin. In general, no one stock or other single investment (excluding mutual funds, which are bundles of investments) should comprise a major part of your portfolio. Varying the types of assets in your portfolio (foreign vs. domestic stocks, bonds, mutual funds, Treasury bills) can provide an additional margin of safety. 

You can’t escape risk in the world of investments, but you should try to choose the investments that fit both your risk comfort level and your personal financial situation.

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Do some midyear planning if you want lower taxes for 2010

July 13, 2010

Summer’s here, and probably the last thing on your mind is tax planning. The problem is that if you wait until December, there’s little time for changes to take effect. But if you take the time to plan now, you still have six months for your new tax strategies to make a difference on your 2010 tax return. So set aside some time for tax planning. Begin by pulling out your 2009 income tax return.

* Review your income and deductions. Did you lose any credits or deductions because your income was above a certain threshold amount? If so, what can you do to keep this year’s income below the threshold?

* Evaluate your investment portfolio. By now you should have an idea whether you’ll be selling any investments this year. Taking losses by pruning your portfolio can be an effective way to manage income.

* Build a retirement fund and cut taxes too. Take advantage of the deductible contributions allowed for IRAs, SIMPLEs, SEPs, and 401(k) plans, especially if you’re 50 or older.

* Check out education tax breaks. If you or your children are in college, review the education tax breaks that are available. Among the breaks: a deduction for student loan interest, education savings accounts, Section 529 plans, and the Hope and lifetime learning tax credits.

* Don’t overpay your taxes. Finally, if you received a large refund on last year’s taxes, consider reducing your withholding for this year. To adjust your withholding, file a new Form W-4 with your employer.

If you’d like to sit down together to discuss tax-cutting strategies that fit your individual situation, please call us.

Leave a Comment » | July 2010 | Tagged: , , , , , | Permalink
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