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This article is the third of a four part series that pertains to year-end financial planning.  The articles will appear on consecutive Sundays during December in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared December 3^rd; “Year-End Tax Planning for Shareholders of Mutual Funds” which appeared last week; this article and finally “Investment Portfolio Re-Balancing for the New Year” which will appear next Sunday.  Following this series, we will immediately provide readers with a Review of 2011 and our Investment Outlook for 2012.

Given the nature of our business, in our opinion the most obvious and effective way to give to a charitable organization is through a gift of appreciated stock.  This is a win-win situation for both the taxpayer and the charity.  The taxpayer can deduct the market value of the stock on the date of the gift and the charity gets the donation.  Furthermore, by donating the appreciated stock rather than selling the stock and donating the cash proceeds, the taxpayer also avoids any capital gains tax.  Please note that this only will work with appreciated securities within taxable accounts.  Should you hold a stock that has depreciated in value, it is generally wise to sell the stock and donate the cash proceeds.  Utilizing this method, the taxpayer can write off the capital loss up to current IRS limitations.

Readers will note that the above paragraph does not pertain only to appreciated stock, but rather to all appreciated assets, including bonds, mutual funds and real estate.

The Pension Protection Act of 2006 allowed taxpayers age 70 ½ to exclude from adjusted gross income qualified charitable contributions up to $100,000 per year from either a traditional or Roth IRA and despite the fact that required mandatory distributions were suspended for calendar year 2009, this legislation was extended through 2011.  Prior to the passing of this legislation, a taxpayer would have to first withdraw the money from his IRA and then make the contribution.  Many times this withdrawal resulted in the taxation of the Social Security Benefits of the taxpayer, reductions in property tax assistance and reductions in other government sponsored programs.  This law allows the taxpayer to circumvent this step thereby eliminating the prior pitfalls noted in the preceding sentence.  Additional benefits to rolling over the IRA distribution directly to a qualifying charity is that this donation qualifies toward the owner’s minimum required distribution, but does not count toward the IRA owner’s maximum 50% cash contribution limit as a percentage of their adjusted gross income.

One final way to get into the charitable giving mood this holiday season is through gifts of life insurance policies.  To accomplish this transfer, the current owner must name the qualified charitable as either the new owner or the irrevocable beneficiary.  If the owner does one of these then he/she is able to obtain a tax deduction on the present value of the insurance contract or his/her accumulated premium payments, whichever is higher.

As always, please be sure to check with your tax advisor prior to making any sizable charitable contributions.

This article is the second of a four part series that pertains to year-end financial planning.  The articles will appear on consecutive Sundays over the next four weeks in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared last week, this article, “Year-End Charitable Bequest Planning; and “Investment Portfolio Re-Balancing for the New Year.”  Following this series, we will immediately provide readers with a Review of 2011 and our Investment Outlook for 2012.

Prior to identifying those areas that can help you reduce your taxes regarding your mutual fund holdings, it is prudent to briefly review the IRS rules surrounding capital gains and losses, in general.  If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income.  The balance can be carried forward, indefinitely.  An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss.  Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are taxed at either zero percent for those taxpayers that are in the 10% to 15% marginal tax brackets or at 15% for those in the twenty-eight percent bracket.  Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income.  For most taxpayers, the rate is twenty-eight percent for the Federal Government.  In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.

Number one, call your mutual fund and ask them if they are planning any year-end distributions.  Keep in mind that capital gains declared by mutual funds are taxable regardless of whether you receive them in cash or reinvest in additional shares.  Furthermore, there is no economic benefit to the distribution.  It is the same as getting four taxable quarters in return for your non-taxable one dollar bill.  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 declared.  This information will help you determine what steps, if any, need to be taken in order to minimize the impact of this declared gain.

Second, swap the mutual fund in which you have a taxable loss for a similar fund.  Please note that your adjusted tax basis consists of your initial contribution to the fund plus any subsequent out-of-pocket contributions as well as any reinvested dividends or capital gains declared during prior calendar years less any withdrawals.  Regardless of what others might say to the contrary, given the fact that there are over eight thousand mutual funds to choose from, there is always an appropriate alternative to your current fund.  Do not think that your fund is “the best” or “one of a kind.”

Be certain to check with your tax advisor prior to making any year-end portfolio transactions. 

Good luck, pruning your portfolio for tax savings makes dollars and cents!

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein.  Securities contain risks and fluctuations in principal will occur.  Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients.  Consult with your financial advisor prior to making any changes to your portfolio.  To contact Fagan Associates, Please call 518-279-1044.

This article is the first of a three part series that pertains to year-end financial planning.  The articles will appear on consecutive Sundays over the next four weeks in “The Record” and include, in order, this article, “Year-End Tax Planning for Shareholders of Mutual Funds; “Year-End Charitable Bequest Planning” and “Investment Portfolio Re-Balancing for the New Year.” Following this series, we will provide readers with a Review of 2011 and our Investment Outlook for 2012.

One of the least time consuming and most profitable tasks one can assume during December as it pertains to their investment portfolio is to attempt to offset realized capital gains with capital losses in your portfolio.  Thus far, calendar year 2011 has been a rollercoaster ride.  Despite this volatility the S&P 500 remains only approximately one-quarter of one percent from where it started.  That said and given the level of volatility investors have witnessed over the past several years, it stands to reason that it would be prudent to examine your gains and losses, both unrealized and realized.  Finally, keep in mind that this article applies solely to shares of that are held in a non-qualified taxable account (not an IRA or pension plan).  Investors who sell these shares would claims the gain or loss on Schedule D of Federal Filing Form 1040.

Please note the following important IRS regulation that pertains to Capital Gains and Losses.  If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income.  The balance can be carried forward, indefinitely.

An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss.  Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are generally taxed at either zero percent for those taxpayers that are in the 10% to 15% marginal tax brackets or at 15% for those in the twenty-eight percent bracket.  Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income.  For most taxpayers, the rate is twenty-eight percent for the Federal Government.  In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.

One final consideration prior to executing a stock or bond trade for tax purposes would be to determine if, by executing this trade, a wash sale would result.  A wash sale exists when the transaction results in a loss and a “substantially identical security” is purchased within thirty days.  If this should occur, the tax loss created by the sale would not be deductible.  Please note that should the wash sale result in a gain, the gain is taxable.

As an aside, never forget that it is always prudent to consider the impact of selling a stock upon your portfolio.  Simply put, it is seldom wise to make a transaction solely for the purpose of saving money on your tax return!

A sale or sales of appreciating and/or depreciated securities represent only one tactic an investor can deploy when tax planning at year end.  Furthermore, please note that this decision must be made in conjunction with and in full knowledge of the resulting impact on your other investments, such as mutual funds.  Be certain to check with your tax advisor prior to making any year-end portfolio transactions!

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 2011 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 approximately twenty 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 2010 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.

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.

Contrary to what the Occupy Wall Street (OWS) movement is protesting, we believe that there is not enough capitalism in the United States and that all Americans would be better served if the OWS movement picked up and moved their camps to Washington, DC where cronyism is rampant.

Despite the above, let us also state that we believe in much of what the Occupy Wall Street movement initially stood for, which we understand to be a return of the focus of America to the middle class.  From our perspective, more and more, too much wealth and power has been concentrated in the top one percent and that all Americans would be better served if some of the wealth and power in American corporations would be distributed among the employees and shareholders and away from upper management and the Board of Directors.

We also believe that capitalism and Wall Street has many faults.  However, theoretically, these faults should be held in check via regulations a la the somewhat recently passed Dodd-Frank Legislation and Sarbanes-Oxley Act of 2002, as well as many others.  This oversight has been spotty at best, as it appears as if too many of our esteemed Senators and Congressmen have been busy enriching themselves rather than performing their duties.

In an exhaustive study that analyzed 16,000 stock transactions by U.S. House of Representative from 1985 to 1981, entitled “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives,” it was determined that “a portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).”  Within other studies, it has also been determined that U.S. Senators beat the stock market by an average of 12% per year, results that are statistically unheard of when compared to those returned by professionals in the industry.

Despite the immorality of this practice that by the way is not limited to one side of the political aisle or the other, Congressional “insider trading” is not illegal as Congressmen are, in a legal sense, not working for publicly trading companies where they would hold a fiduciary responsibility to the shareholders.

Although undeniably the best system capable of unleashing the potential of its citizens as well as provide personal freedom, we recognize that capitalism is not perfect.  However, we rely on our elected officials to curb those imperfections, one of which is greed.  It is for this reason that we urge all participants in Occupy Wall Street to concentrate their efforts on Washington, DC and urge our political leaders to always act in the best interest of their constituents, putting themselves second.

The Congressional Debt Committee, which concludes this coming Wednesday with its’ recommendations, has that opportunity.  This committee has been charged with reducing the federal deficit by at least $1.2 trillion over the next ten years.  Anything less than that should bring a sell-off in stocks while anything greater should be celebrated.

THE BOTTOM LINE – As the title of a famous Bob Dylan song states, we do believe that “The Times They Are A Changin’” as many of our new elected political leaders, both Republican and Democrat, are dedicated to making changes for the betterment of America and Americans.  However, we urge them to avoid the temptations that we can assume are great and concentrate on the job at hand which is to right the economic and social course of our country and to live up to the oath that they take upon entering office.  Our corporate leaders would also be well-served to look inwards to see where they are letting their fellow citizens and shareholders down.  Oh, by the way, this will pave the way for a major bull market move.