Year-End Planning: Investments


Before you shut down for the holidays, remember that just a few hours spent reviewing your financial life may help boost your bottom line - and put a dent in your holiday shopping bills! Here are six ideas to consider for your investment accounts before we ring in the new year. 1. Sell winners in taxable accounts. Although capital gains rates increased for individuals earning $400,000 and joint filers who earn more than $450,000, in 2013 married tax filers with taxable income up to $72,500 (singles up to$36,250) still have a zero percent tax rate on long-term capital gains and qualified dividends. If you are at the zero percent capital gains rate now, but expect your income to be higher later, you may want to realize capital gains today at the lower rate. Your taxable income includes the gain, so make sure that you factor that in when you make your decision.

2. Sell losers. If you have investment losses in a taxable account, now is the time to use those losers to your advantage. You can sell losing positions to offset gains that you have taken previously in the year to minimize your tax hit. If you have more losses than gains, you can deduct up to $3,000 of losses against ordinary income. This is particularly useful, since your ordinary income tax rate is higher than your capital gains tax rate. A $3,000 loss against ordinary income could be worth anywhere from $300 to $588 in reduced taxes. If you have more than $3,000 of losses, you can carry over that amount to future years.

3. Avoid getting soaked by a wash sale. If you are starting to clean up your non-retirement accounts to take losses, don't get soaked by the "wash sale" rule. The IRS won't let you deduct a loss if you buy a "substantially identical" investment within 30 days, which is known as a wash sale. To avoid the wash sale, wait 31 days and repurchase the stock or fund you sold, or replace the security with something that is close, but not the same as the one you sold- hopefully something cheaper, like an index fund.

4. Minimize your dividend-paying positions. Dividend income tax rates jumped this year for high wage earners. The net investment income tax levies an additional 3.8 percent on net capital gains, dividends, interest, rents and royalties. If you forgot to make the change last year, or think that your tax bracket could rise next year, consider shifting dividend-paying stocks and mutual funds into retirement accounts, where the increase will not be in effect.

5. Give appreciated stock or fund shares to charity: Get in the holiday spirit, with the help of Uncle Sam. One way to lower your tax bill in April is to donate appreciated securities, like stocks, bonds or mutual funds, to a charity. If you itemize deductions, you'll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains. The low cost basis does not impact the receiving charity, as long as it is a tax-exempt organization.

One note: For 2013, the overall limit on itemized deductions was reinstated for certain taxpayers. The limitation (known as Pease limit) is applied to single filers who earn more than $250,000 and joint filers who earn more than$300,000. Be sure to factor in the change when accounting for the value of the donation.

6. Rebalance your investment accounts: The suggestions above should be part of a larger analysis of your investment accounts. The soaring stock market has probably thrown your allocation out of whack, so it's time to rebalance and get back on track. One of the best aspects of rebalancing is that it can force you to sell while the asset value is high and buy when other asset values are depressed. Compare that with the usual "buy high-sell low" cycle that can ensnare emotional investors!