It's not
too soon to tackle
year-end tax planning
by Andrew Leckey
It's
now or never. As the stock market lurches into the final stage
of a year that's been a mixed bag, some year-end tax planning
is in order.
"When people do
their returns next year, too many will suddenly realize they
really could've done something to improve their situation,"
noted Robert Greisman, tax partner with BDO Seidman LLP. "Pull
back and think about it now, not later."
There are some important
tax considerations tied to the performance of your investments
in 2000.
If you own some stock
losers this year, sell to offset some of your stock gains, especially
those gains from profitable stocks you've held for several years.
If you're nervous about your unrealized gains in a stock that
might be knocked down by the market, act now.
Capital losses can
completely offset your capital gains, plus up to $3,000 of ordinary
income such as wages. Locking in your gain and having it offset
by a loss makes for a winning strategy.
Even mutual funds that
have declined in value this year will be announcing year-end
capital gains distributions now through December. Some taxable
distributions will be hefty, not because of any success this
year, but because appreciated stocks and bonds held for several
years were sold by the fund.
Carefully study the
tax effects if you're buying a fund this time of year. Defer
your purchase until after the distribution occurs to avoid an
unpleasant surprise on your IRS 1099 form.
You can take a tax
loss this year while essentially preserving your investment positions,
so long as you don't violate the "wash sale" rule.
That rule disallows the loss if you buy the same stock within
the time period running from 30 days before to 30 days after
the sale date. This window of time continues into January if
you sell in late December.
"The wash sale
will be a lot more common this year as people sell to harvest
their losses, but they must watch out," warned Martin Nissenbaum,
national director of personal income tax planning for Ernst &
Young. "If, say, you own a hard-hit technology stock, sell
to harvest the loss and expect a rebound, you can't take the
deduction if you violate the rule."
Vincent Vaccaro, national
director of personal tax consulting for PricewaterhouseCoopers,
has been spending time with clients matching buys and sells to
come up with losses to offset gains.
"The initial public
offering market was going crazy in January and February before
everything just dropped out in April," Vaccaro said. "I
had a lot of clients who took some very early gains and now we're
trying to offset them."
You'll be hearing about
some tax changes that kick into gear next year.
The long-term capital
gains rate for taxpayers in the higher income tax brackets drop
to 18 percent from 20 percent on securities held more than five
years. This applies only to securities acquired after Jan. 1,
2001. For those in the 15 percent tax bracket, the long-term
capital gains rate drops to 8 percent from 10 percent, and there's
no requirement that the holding period must begin after 2000.
Times are rapidly changing, and the fact that individuals are doing more stock trading on their own makes it especially important to keep good records of all your transactions. That's easy to do if you're organized.
"The IRS is really serious about wanting to know what each of your individual trades has been," counseled Maggie Doedtman, senior tax research and training specialist with H&R Block. "So if you're trading yourself instead of going through a traditional broker, make sure you keep all the statements and records."
There's more to year-end tax planning than securities trades. The overall process typically involves deferring income and accelerating deductions. You seek to recognize income in years that your marginal tax rate is comparatively low, while paying deductible expenses when your tax rate is high.
Some time-tested steps to accomplish this include pre-paying in December your January mortgage payment, as well as your state and local income taxes. You might defer your bonus or sales commission to next year, or defer some interest income by purchasing a short-term certificate of deposit that doesn't mature until next year.
You can also donate appreciated stock instead of cash to charity so that you won't have to pay capital gains tax, and you can deduct the stock's full market value on your tax return. In all your planning, keep in mind that gains from investments held more than 12 months qualify for the lower long-term capital gain tax rate. Too many investors get caught up in the market and, in a selling frenzy, forget that basic fact.
Editor's Note: Andrew Leckey's column Successful Investing appears in each issue of the print version of the Bull & Bear Financial Report.
