Tax Tip of the Week- Five Year-end Tax Strategies for Investors

Home » Blog » Tax Tip of the Week- Five Year-end Tax Strategies for Investors

Types-of-investors-300x300 As the year comes to a close, investors can still make some moves that will lower your tax hit. The following is a list of the common moves that investors should consider:

Trigger your losses before year-end. Capital losses first offset capital gains. So review your portfolio and your transactions for the year. If you have sold investments at a gain or have investments that you are considering selling at a gain, look at selling your investments that have lost value in order to reduce the tax hit. If your losses exceed your income, you may deduct $3,000 against other income with any excess being carried forward to future years.

Avoid the “wash sale” rule. You may have a “book” loss in a stock that you wish to keep because you are convinced will make a comeback. You can’t sell the stock, take your loss, and then purchase the stock again. This triggers the “wash sale” rule since you are replacing the security if you replace the stock with a “substantially identical” security within 30 days of selling the stock (either before or after the date of the sale). This would disallow the loss as a deduction. Avoid the wash sale rule by waiting at least 31 days before buying the stock back.

Take advantage of the 0% capital gain rate. If you’re regular tax rate is 25% or higher, the maximum capital gain rate is 15% for 2010. At this time this rate is set to expire at year end. But, there are reports today that a deal have been reached to extend them for 2011 (though I still follow the rule of only believing such reports only when the bill is signed.) If you are in a lower tax rate your capital gain rate is Zero. Strategy: have a child who is in the lower rate trigger the sale and pay no tax (assuming that the “kiddie tax” doesn’t apply).

Cut “kiddie tax” effects. Under the “kiddie tax” rules, investment income received by a child is potentially taxed at the parents higher rates to the extent that the investment income exceeds the annual threshold of $1,900. Keep your child’s investment income below $1,900 by reallocating investments owned by the child before year-end. Try shifting funds to investments into those that won’t result in taxable income in 2010. This could include purchasing growth stocks and tax-free municipal bonds.

Postpone tax on real estate gains. If you sell investments real estate at a gain (a thing that is rarer now a day’s then it used to be) you will have to pay the tax on the full amount in just a few months. Consider selling it on an installment sale with at least part of the funds being received in 2011 and beyond. This will delay the tax payment and will most likely reduce the balance due if reporting the complete gain would have pushed you into a higher tax bracket.