Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
How was your Thanksgiving? Hopefully it was great. And by now you have shooed away your visitors and are ready to take on that all-important December task. You know, the one that can affect your wallet for months to come?
No, not holiday shopping … tax planning!
On my Money Matters radio show we constantly remind listeners that it’s not what you earn, it’s what you keep that determines personal wealth. Capital gains taxes can do serious damage to your portfolio’s rate of return. Income taxes can make you wonder why you even bother going to work. When you visit a CFP® Professional you should address both of these issues by asking:
*MLPs are “Master Limited Partnerships” that trade just like stocks. MLPs are typically involved in the commodity, energy and natural resource industry. They can offer investors potential tax advantages because a “portion” of the income earned from an MLP may be tax deferred.
So, as 2010 winds down there are a few things you can do to lower your bill to Uncle Sam. As always, be sure to talk to your personal CPA or tax advisor about your specific tax situation.
1. Tax-loss selling: Take advantage of a stock market that is up over 70% in the past 2 years. If you need to rebalance your portfolio, you may want to sell stocks that have significant gains over the last two years. Let’s say you have $5000 worth of “gains” in your brokerage account (this strategy does not apply to a “retirement account” such as an IRA or ROTH) from selling a stock or mutual fund. Now, find other stocks in your portfolio with losses that total $5000 that can be sold to offset those gains. HINT: In order to actually count as a loss, a stock must be sold for less than what you paid for it, in essence the loss is “realized”. This can be a nice way to significantly reduce what you may owe in capital gains tax.
2. Watch for costly payouts: Many mutual funds distribute their capital gains at the end of the year. That means that you could buy a fund on Dec. 15, hold it for only one day, and if the fund gives a “distribution” on Dec. 16 you will be responsible for the full taxable distribution as if you had held the fund all year long! So be careful – if you are planning to invest new funds this time of year, look to ETFs (Exchange Traded Funds) that will have very limited or no distributions before year end.
3. Make January mortgage payment in December: This allows you to take an additional deduction for interest paid. Remember to add the January interest to the amount reported on the 1098 you receive from your lender.
Again, it makes sense to consult the appropriate advisors when discussing tax strategy. Most CFP® Professionals are not licensed to provide complete tax advice. Bring your advisors together. Your investment professional and CPA should talk occasionally to ensure that the hand of investment planning is well protected by the glove of tax planning.