Q: What tax moves should investors make by the end of the year to minimize what Uncle Sam takes in taxes?
A: If you don’t pay attention to the tax hit of your stock moves, you might be paying Uncle Sam too much.
There are several simple maneuvers you can make when it comes to you portfolio to make sure your tax hit is as small as possible.
The first step all investors should take is tax-loss harvesting. If there are some money-losing dogs in your portfolio, now’s the time to start selling them. If you sell your losers, you can use those capital losses to offset any capital gains you might have had from selling winning stocks. It gets better. If your capital losses outstrip your capital gains, you can use those capital losses to reduce your ordinary income by up to $3,000 a year. And you can then carry those losses forward indefinitely until you exhaust them.
These capital losses are very lucrative already, but could be even more attractive depending on what Congress decides with tax rates and what happens with tax rates in the future, says Barbara Weltman, contributing editor to J.K. Lasser and author of 1001 Deductions and Tax Breaks.
Just be careful. When you sell a stock, you can’t buy it back for more than 30 days or you risk triggering a so-called wash sale. If you buy a stock that you sold for a loss back, you may lose out of the capital loss deduction.
There is a dilemma with tax loss selling, too. What if you sell a stock for tax reasons, but still like the stock? It would be somewhat tragic if the stock you’ve been losing money on for so long rallied in December after you sold it for tax reasons.
There are ways to manage this situation and the wash sale rule, Weltman says. For instance, let’s say you have a large loss in shares of a drugmaker, but you still like the pharmaceutical industry and don’t want to be out of the market for more than 30 days. You might consider buying shares of a competitor in the drug industry you think also has good prospects. You can also purchase a stock index mutual fund or exchange-traded fund that owns the stock and hold that while you wait the 30 days.
By Matt Krantz