Capital Ideas on Gains and Losses
Will you have capital gains or losses this year? If so, take a look at your investment portfolio for opportunities to reduce your federal income taxes. How you manage your capital gains and losses may be very important.
When reviewing your gains and losses, consider these strategies:
Realize capital losses to offset capital gains and ordinary income
If you are going to have capital gains this year, consider selling investments that have lost value. The realization of these losses, called capital losses, can be used to offset capital gains on a dollar-for-dollar basis. There is no limit to the amount of capital gains that can be offset by losses.
If you find that you have capital losses that exceed your gains, these losses can offset ordinary income on a dollar-for-dollar basis up to $3,000. Any remaining losses can be carried forward to future years.
When realizing capital losses, avoid the wash-sale rules
If you sell a security at a loss and then repurchase the same or a “substantially similar” security within 30 days before or after the trade date, the loss will be disallowed by the IRS under the wash-sale rule. There are several strategies that you can consider to avoid the wash-sale rule involved in bond swaps and equity exchanges. Bond Swaps - If you are going to realize capital losses, now may be a good time to take losses in your bond portfolio by switching from an out-of-state municipal to an instate municipal, or to an alternative minimum tax (AMT) bond that offers a higher yield. Bonds of the same issuer but with a significant difference in coupon or maturity, or bonds of a different issuer, are not “substantially similar,” and thus, would avoid the wash-sale rule.
Equity Exchanges - For realizing capital losses using capital losses using equities, there are two choices to consider:• Reinvest in securities that are not substantially identical, such as the securities of another company in the same industry. If you would like to maintain industry exposure without single stock risk, consider the flexibility and benefits of swapping into Select Sector SPDRs® or HOLDRSsm.*• If you want to realize losses but are unwilling to forgo any potential gains during the 30-days “wash-sale” period, consider “doubling up.” This strategy involves purchasing the same amount of shares to be sold, waiting 31 days and then selling the shares acquired first. Doubling up, however, can expose you to additional risk, especially if the stock is on the decline. The last day to double up and still be able to realize a loss this year is November 28. Recognize capital losses on securities that are close to worthless
If you own securities of an operating company on which no bid can be found and wish to take the loss now, a private sale to an unrelated party may be the solution. A reasonable price must be the solution. A reasonable price must be set and a receipt given; a security transfer to the account of the buyer will substantiate the loss.
Give appreciated assets to charity now to obtain a current tax deduction and avoid paying tax on the capital gain
Consider using appreciated securities held long term to make contributions to public charities. This strategy may allow you to obtain a charitable deduction for the market value of the gift and avoid the tax liability on the capital gain. Remember that the long-term holding period for this purpose is longer than one year. (The deduction for the property held for short term is limited to the cost basis.)
Keep in mind that if you wait until the end of December to make a securities donation, there may not be enough time to complete delivery on the shares for tax purposes. If, however, both the donor and the charity have street-name accounts with the same firm, the transaction is much easier and the transferring journal entry will constitute delivery and complete the gift.
The deductible limit for gifts to public charities of appreciated securities held long term is 30% of adjusted gross income. If your donation exceeds this limit, you may carry forward the excess deduction for a period of five years. If you donate cash instead of securities, the limitation is 50% of adjusted gross income, with the same five-year carryover.
Time mutual-fund buying to avoid unpleasant surprises at tax time
Year-end purchases of mutual funds should be handles with extreme care. Mutual funds that realize capital gains during the year generally distribute these gains by year end. As a result, if you are a fund shareholder, you will have income to report on receipt of these distributions. Thus, the purchase of a mutual fund just prior to its distribution date may create an unnecessary tax burden. Before purchasing any mutual fund, determine the fund’s date of distribution and consider buying after that date.
Remember, review your capital gains and losses each year. If you have net gains for the year, consider taking losses to reduce taxes.
When reviewing your gains and losses, consider these strategies:
Realize capital losses to offset capital gains and ordinary income
If you are going to have capital gains this year, consider selling investments that have lost value. The realization of these losses, called capital losses, can be used to offset capital gains on a dollar-for-dollar basis. There is no limit to the amount of capital gains that can be offset by losses.
If you find that you have capital losses that exceed your gains, these losses can offset ordinary income on a dollar-for-dollar basis up to $3,000. Any remaining losses can be carried forward to future years.
When realizing capital losses, avoid the wash-sale rules
If you sell a security at a loss and then repurchase the same or a “substantially similar” security within 30 days before or after the trade date, the loss will be disallowed by the IRS under the wash-sale rule. There are several strategies that you can consider to avoid the wash-sale rule involved in bond swaps and equity exchanges. Bond Swaps - If you are going to realize capital losses, now may be a good time to take losses in your bond portfolio by switching from an out-of-state municipal to an instate municipal, or to an alternative minimum tax (AMT) bond that offers a higher yield. Bonds of the same issuer but with a significant difference in coupon or maturity, or bonds of a different issuer, are not “substantially similar,” and thus, would avoid the wash-sale rule.
Equity Exchanges - For realizing capital losses using capital losses using equities, there are two choices to consider:• Reinvest in securities that are not substantially identical, such as the securities of another company in the same industry. If you would like to maintain industry exposure without single stock risk, consider the flexibility and benefits of swapping into Select Sector SPDRs® or HOLDRSsm.*• If you want to realize losses but are unwilling to forgo any potential gains during the 30-days “wash-sale” period, consider “doubling up.” This strategy involves purchasing the same amount of shares to be sold, waiting 31 days and then selling the shares acquired first. Doubling up, however, can expose you to additional risk, especially if the stock is on the decline. The last day to double up and still be able to realize a loss this year is November 28. Recognize capital losses on securities that are close to worthless
If you own securities of an operating company on which no bid can be found and wish to take the loss now, a private sale to an unrelated party may be the solution. A reasonable price must be the solution. A reasonable price must be set and a receipt given; a security transfer to the account of the buyer will substantiate the loss.
Give appreciated assets to charity now to obtain a current tax deduction and avoid paying tax on the capital gain
Consider using appreciated securities held long term to make contributions to public charities. This strategy may allow you to obtain a charitable deduction for the market value of the gift and avoid the tax liability on the capital gain. Remember that the long-term holding period for this purpose is longer than one year. (The deduction for the property held for short term is limited to the cost basis.)
Keep in mind that if you wait until the end of December to make a securities donation, there may not be enough time to complete delivery on the shares for tax purposes. If, however, both the donor and the charity have street-name accounts with the same firm, the transaction is much easier and the transferring journal entry will constitute delivery and complete the gift.
The deductible limit for gifts to public charities of appreciated securities held long term is 30% of adjusted gross income. If your donation exceeds this limit, you may carry forward the excess deduction for a period of five years. If you donate cash instead of securities, the limitation is 50% of adjusted gross income, with the same five-year carryover.
Time mutual-fund buying to avoid unpleasant surprises at tax time
Year-end purchases of mutual funds should be handles with extreme care. Mutual funds that realize capital gains during the year generally distribute these gains by year end. As a result, if you are a fund shareholder, you will have income to report on receipt of these distributions. Thus, the purchase of a mutual fund just prior to its distribution date may create an unnecessary tax burden. Before purchasing any mutual fund, determine the fund’s date of distribution and consider buying after that date.
Remember, review your capital gains and losses each year. If you have net gains for the year, consider taking losses to reduce taxes.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!
* Select Sector SPDRs (Standard & Poor’s Depository Receipts) are exchange-traded fund shares that enable investors to buy and sell any of the nine major sectors that make up the S&P 500, much as they would uy or sell a share of stock. Select Sector SPDRs fund shares trade on the American Stock Exchange.