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This time of year, we all have a lot on our minds. If you are like us, you are still raking leaves and cleaning up the year. For our family, it is certainly time (and perhaps a little past time) to begin to get ready for the holidays and unfortunately, it will soon be time to retrieve our snow shovels. As calendar year 2009 draws to a close, it is also time to clean up your portfolio and begin to prepare for next year. With this in mind, we have put together a small list of some “portfolio chores” that may put more bucks in your wallet in the form of tax savings. Please note that some of these suggestions only pertain to investments in non-qualified or currently taxable accounts.
Despite the recent rally, as of this writing the Standard & Poor’s 500 remains nearly thirty percent below its record high set back in early October 2007. For this reason, it is likely that many of our readers have stocks that are well below your purchase price. However, you may also believe in the long term growth prospects of the investment. Assuming the investment is in a taxable account (non-qualified), one might double up on the current share balance in an investment, wait thirty days, and then sell the shares he/she initially held. The benefit would be a deductible loss on the shares you ultimately sold without losing your position in the security. The risk would be that over the next thirty days, the stock declines thereby increasing your loss due to the additional shares. Another risk would be that your portfolio becomes too heavily weighted in a particular stock or industry for those thirty days. Nonetheless, the widely practiced strategy merits a look. Here’s how it works. Let’s assume that you purchased 100 shares of General Electric at $50.00 per share. Despite the climb from its lows to its current prices of approximately $16.00, you have still lost $3,400 in this investment. According to the “doubling up” model, you would purchase another 100 shares of G.E. at its current price, wait thirty days and then sell your initial shares. This exercise would enable you to deduct the loss on G.E. up to a limit of $3,000. It would also not compromise your investment in G.E. over the next thirty days, should the stock begin to move upward.
One thought regarding the above paragraph, take out your calendar year 2008 Federal Income Tax return, look at Schedule D and determine if you are carrying forward any losses beyond the $3,000 limit mentioned above. If you are, include this in your year-end investment planning.
Call your mutual fund and ask them if they are planning any year-end distributions. Do not add insult to injury by having to pay taxes on capital gain distributions despite the fact that you are losing money in the fund. Remember, capital gains declared by mutual funds are taxable despite the fact that you, as an individual, may not have benefited from the investment, and may indeed be losing money. Furthermore, that capital gain is taxable despite the fact that you may be reinvesting in additional shares. Upon calling, should you learn that your mutual fund is intending to declare a capital gain, find out how much it will be on a per share basis and on what date it will be paid. This information will help you determine what steps need to be taken in order to minimize the impact.
Swap the mutual fund that you are losing money in for a similar fund. Two thoughts pertain to this statement, the first being that, given the fact that there are over seven thousand mutual funds to choose from, there is always an appropriate alternative for your current fund. The second thought is more of a reminder. Remember that your basis for tax purposes in your investment consists of any out of pocket deposits you have made into the fund plus any dividends and/or capital gains that you have reinvested into the fund either during this calendar years or prior years minus any withdrawals you have taken from the fund. Once again, given the length and depth of this bear market, many investors may be in a position that they are losing money when comparing the current market value of their fund versus their cost basis.
Finally, keep in mind that the Internal Revenue Service suspended all Mandatory Retirement Distributions for 2009 due to the poor market conditions that existed during 2008. Therefore, if you do not need the money to maintain your standard of living, there is no need to take a distribution.
Don’t wait. Take a couple of hours to clean up your portfolio. Our guess is that it will be time well spent. We will be touching on other tax-savings techniques regarding your investments in the coming weeks.