Year-End Tax Management Strategies
by Terry D. Sandven, Portfolio Strategy
Group
U.S. Bancorp Piper Jaffray
Portfolio
management is a dynamic process of monitoring and adjusting investment portfolios.
Included in this process is the effective and efficient management of taxes.
To that end, while we encourage investors to consult with their tax advisors
to address specific needs, we offer several strategies that may assist investors
to reduce their tax liabilities as well as to determine if opportunities
exist.
30-Day
Wash SalesWash sales are defined
as the purchase and sale of a security either simultaneously or within a
short period of time. Wash sales apply to individuals who want to take a
tax loss in the current year on shares of a company that have declined in
value from the purchase price. Under IRS rules, a loss on the sale of a
stock may not be used for tax loss purposes if the same stock, or an equivalent
one, is purchased within 30 days before or after the date of sale. As such,
investors who want to own shares of a particular company at year-end have
until November 30 to capitalize on wash sales. To adhere to the IRS 30-day
wash rule, these investors have two options:
Option
1: Purchasing additional shares
on or before November 30 allows enough time to sell the initial position
by December 31. Risks of this option center primarily on exposure. The strategy
increases exposure to a particular company twofold during the 30-day waiting
period.
Option
2: Investors may sell the initial
position at any time during 1999 to realize the loss in 1999. (However,
if investors wish to reinstate the position before the last day of the current
year, the sale must be made on or before November 30.) Risks of this option
center primarily on lack of exposure. This option eliminates exposure to
a particular company during the 30-day waiting period. As such, the opportunity
costs, should the stock appreciate, could diminish tax benefits.
Upgrade
Equity PortfoliosA popular year-end
tax management strategy is to upgrade the equity portfolio. The concept
involves swapping out of "losers" and into peers or companies
where earnings are generally regarded as being more visible, while realizing
a tax loss in the process. Earnings visibility is widely regarded as being
important as we approach Y2K and the new millennium.
Bond
SwapsA bond swap, for tax purposes,
involves selling bonds that are owned at higher prices with the sale proceeds
used to purchase other bonds, presumably those with similar characteristics.
The realized loss is often used to offset other capital gains, thus reducing
the overall tax liability.
Investors
have until the end of the calendar year to execute tax swaps. We are also
mindful that the pressures of demand over available supply typically increase
towards late December. Thus, we encourage investors to assess their tax
swap opportunities before year-end.The
advantages of bond swaps extend beyond tax benefits; swaps may also be used
to enhance income streams, improve credit quality, extend maturities, or
improve call protection.Retirement
PlansInvestors can reduce their
taxable income by putting maximum allowable pretax dollars into 401(k) or
403(b) plans as well as IRAs. To be sure, this strategy applies throughout
the entire year and not just year-end.GiftingInvestment gifts meet several objectives, including
estate size reduction. Individuals are allowed to give up to $10,000 per
year to any person without incurring taxes on the gift.Charitable
ContributionsInvestors may benefit
more from donating appreciated assets versus giving cash. In most cases,
investors avoid paying capital gains on donated appreciated assets. Hence,
not only are taxes avoided on capital gains, the charitable institution
receives a larger gift compared to cash paid from after-tax dollars.