The periodic re-balancing of your investments is a good
financial habit. You can achieve even better results by considering
the tax impact of your decisions.
The periodic re-balancing of your investments is a good financial habit. You can achieve even better results by considering the tax impact of your decisions.
What are some basic things a tax-wise investor should consider before selling investments?
Capital gains and losses. Net long-term gains for investments held longer than one year are treated more favorably than short-term gains. The top tax rate on long-term gains is 20 percent, while you could pay as much as 38.6 percent on short-term gains. Holding investments long enough to qualify for the more favorable rate can have a substantial impact on your financial situation. If you have net capital losses, you can use up to $3,000 per year to shelter other sources of income.
Wash-sale rules. Be aware of the wash-sale rules. Losses from investments that you sell cannot be used to offset gains if you re-purchase a substantially identical security within 30 days from the sale date.
Taxable vs. retirement accounts. In your taxable accounts, consider selling your losers to generate tax losses to offset gains and other income. In your retirement accounts, you can sell winning investments without any tax cost.
Charitable donations. If you want to donate some of your investments to charity, it makes tax sense to first sell losing investments to enjoy the tax savings, and then donate the cash proceeds. If you wish to donate winning investments, it’s generally better to donate the asset. That way you can get a charitable tax deduction for the fair market value of the stock and pay no capital gains tax on the appreciation in your investment.
Proposed dividend changes. President Bush has proposed making most stock dividends non-taxable income to shareholders. This change could significantly alter your investment choices if such legislation becomes law.
We can help you navigate the tax waters of your investment decisions. Call on us to help simplify, clarify, and add value to the process.
Bob Bianchi is a CPA and partner with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister and in Morgan Hill.
