Look at tax status of your investments before year is over
While it is generally not a good idea to try to time the market when making investment decisions, timing can have a major impact on the tax consequences of those decisions. Determining if you should sell investments before year-end could maximize your tax savings.
On your tax return, capital losses are netted with capital gains (the profit you make when selling a capital asset, like stock). If the result is a gain, the tax is computed at the capital-gains rate (typically 15 percent) or your regular rate (up to 35 percent), depending on whether the net gain is long-term (the asset was held for more than 12 months), or short-term. If the net result is a loss, individuals can deduct up to $3,000 against other income in the current year and carry over any remaining losses to the next year.
By determining your year-to-date gains and losses now, you can time sales of other investments before year-end to maximize your tax savings.
If you have a net capital gain, consider selling off investments with unrealized losses to offset the gain. However, first evaluate whether it pays to do so, due to differences in tax rates.
If you decide to offset the gain, keep in mind that, while you must separately determine your net short- and long-term gain or loss, the netting rule allows you to offset a short-term gain with a net long-term loss or visa versa. Your tax savings will be based on the type of gain you reduced or eliminated, not the type of loss you used.
For example, if you are in the 35 percent tax bracket and have a net short-term gain of $50,000, you can use a $50,000 long-term loss to offset it. This saves taxes at the 35 percent rate ($17,500) because you eliminated the short-term gain that would otherwise be taxed at the 35 percent tax rate.
With this approach, it may be wiser to pay 15 percent tax on net long-term capital gains and defer realizing the loss until it can offset gains that would be subject to higher tax rates.
If you have net capital losses and have appreciated assets that you plan to sell in the future, consider accelerating sales to generate gains that will be offset by the loss. But again, evaluate whether it may be more beneficial to carry forward the loss.
For instance, if you can use the loss next year to offset short-term gains, rather than using it to offset a long-term gain this year, allowing the loss to carry forward may be worthwhile.
As a reminder: If you sell shares purchased at different times, you will normally want to identify high-basis shares as having been sold to reduce gain on the sale. IRS regulations provide specific rules for identifying the shares sold and require it to be done before you sell the shares, not when you sit down to prepare your tax return.
If you do not specify which shares you are selling, they will usually be considered sold on a first-in, first-out basis.
For tax purposes also, the trade date, not the settlement date, of publicly traded securities determines the year in which gain or loss is recognized.
One last word of caution: Consider market conditions and expectations when dealing with tax planning for gains and losses. It's all in the timing when it comes to taxes.
Doreen Griffith is managing partner of the Honolulu office of Grant Thornton LLP. She can be reached at Doreen.Griffith@gt.com