New Wrinkle for Year-End Tax Planning
Tax moves for tax-year 2012 are complicated by the as of yet unresolved fiscal cliff issue. No one can know how taxes, particularly capital gains taxes, are going to change in the coming year. Many are making the assumption that they will go up, but the question of how much is still up in the air, and it’s difficult to chart a course based on what you fear may happen but don’t know will happen.
If you make assumptions about future returns in your investments and the rate at which gains will be taxed, you can estimate how long you’d have to hold on to a fund with long-term gains to be better off than paying 2012 long-term capital gains rates (15%). And on the flip side of that coin, it may also be more valuable to hold onto losses until next year to offset gains at higher rates.
What follows is a quick guide to our standard approach to year-end tax planning, but bear in mind that you may want to factor the fiscal cliff wrinkle into your personal accounting.
Turn Losses into Relief
While we caution against letting the “tax tail wag the portfolio dog,” you may want to consider taking advantage of the opportunity to trim your taxes by “harvesting” tax losses on mutual funds you own in taxable accounts. (If you own your funds in tax-advantaged accounts, such as IRAs, there is no need to worry about tax-loss harvesting.)
By harvesting, we’re referring to offsetting any capital gains you incurred in 2012 by selling funds (or particular share lots) that have lost value since your original purchase. Short-term gains are subject to ordinary income tax rates, which can be as high as 35%–and may be heading higher. Losses can also be used to offset ordinary income, but only up to $3,000 per year. Any losses not used this year can be carried forward to future years.
As you consider your tax-planning options, however, be aware of the wash-sale rule. This rule is designed to prevent investors from temporarily selling shares to gain a tax advantage and then repurchasing them a short time later.
Under the wash-sale rule, you lose the ability to claim a tax loss if you make a purchase of the same fund (or a substantially similar fund) 30 days prior to or 30 days after a sale. Therefore, if you sold 100 shares of XYZ fund on December 15 at a loss and bought the shares back on January 3, 2012, you could not claim a capital loss. The same rule would apply if you bought shares on November 15 and sold them on December 12. These rules apply whether you made a direct purchase or reinvested a fund distribution.
Assuming you abide by the wash-sale rule, harvesting tax losses can be a cost-saving aspect of your investment strategy. You should also be careful not to sell shares of a fund you won’t be able to replace. For example, if a fund is closed to new investors and you sell all of your shares, you won’t be able to buy back in.
As always when it comes to tax planning, our best advice is to speak to a trusted professional tax advisor–especially this year, with the potential for higher taxes looming–to help you come up with a course of action that works best for you.
About Adviser Investments
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the fifth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2017. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015 and 2016.
For more information, please visit www.adviserinvestments.com or call 800-492-6868.
Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance.
Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility.
© 2018 Adviser Investments, LLC. All Rights Reserved.