While shopping, decorating and wrapping gifts for others during the holidays, don’t forget to take care of your own tax interests — it could mean a substantial savings in your pocket, instead of more money in Uncle Sam’s.
“Things are flip-flopped this year,” said Tad Goodenbour, tax partner at BKD. “Chances are you have no more gains in your portfolio. But if you sold stock earlier, you have gains — then your portfolio went to hell, and you haven’t sold it, yet.”
But taxpayers can offset the gain with the losses, if they sell their stock before the end of the year — with a Dec. 31 trade date.
For a hypothetical portfolio that had $100,000 in capital gains during 2008, the investor could sell some stock now and perhaps generate $125,000 in losses.
“If you don’t sell it, you have to pay taxes on $100,000 in ’08,” Goodenbour said. “But if you sell those loss stocks this year — you pay no capital gains taxes, and you carry forward the $25,000 loss. Historically, people didn’t have big losses in their portfolios, but now they do. So now is a perfect opportunity to offset gains from earlier in the year.”
Matching of one’s gains and losses is more important this year. With careful tax planning, he said, many investors have — in connection with the matching of gains and losses — been able to forego their fourth quarter estimated tax payments.
One important caveat remains, however, before deliberately selling stocks at a loss — from an economic standpoint, people have to “be comfortable” and not buy or sell stock strictly because of tax purposes.
“Don’t let the tax tail wag the dog,” Goodenbour said.
Investors also should be wary about the wash-sale rule, which precludes deducting the loss of a stock sale if one buys a similar amount of shares within 30 days before or after selling stocks at a loss.
Business owners and investors involved in real estate partnerships and other limited liability corporations need to check their tax basis and their at-risk basis to be certain they have sufficient of both to deduct any losses allocated, Goodenbour said.
And, he said, people tend to forget that if they own mutual funds, the capital gains dividends are generally paid now and through the end of the year.
So, unless investors check their 1099s or brokerage statements, or go to their mutual fund manager, they won’t know what dividends have been paid.
Jack York, vice president of investments at UBS Financial Services, advises clients to maximize contributions to their retirement accounts, including employer-sponsored plans, Roth Individual Retirement Accounts and traditional IRAs.
And, for investors older than 70 1/2 who have to take the required minimum distribution from an IRA, York said, “if they don’t need the income, they can make a donation directly to a charitable organization — then they don’t have to declare that income on a tax return.”
Altruistically, the “ultimate in charitable giving is to give money away without regard for personal benefit,” Goodenbour said.
However, the deductible limitations are based on one’s adjusted gross income, he said, so “be sure you have sufficient AGI to support your level of contribution.”
And because the market has “flipped things around from conventional thinking,” Goodenbour said, philanthropists should be careful not to donate loss-stock to charity if they are concerned about tax deductions.
For instance, if an investor gives away $1,000 of stock that has a cost basis of $3,000, she or he has a $1,000 tax deduction — but could sell the stock for $1,000, donate the cash to charity and, in addition, have a $2,000 tax deduction.
After all, no matter how selfless one might be, the money is better off in your pocket than with the Internal Revenue Service.