Year End Tax Strategies for Investors and Traders

As the year comes to an end, many investors and traders are looking for end of year tax strategies that could minimize their tax liability.

Tax Strategies That Could Save You Money

Offsetting Losses

December is an ideal time to review your taxable investments and implement strategies that can increase your long-term rate of return. Selling losing positions that are not realized yet to offset gains that were realized earlier in the year is a beneficial tax strategy you should consider.

Paper losses do not help you in reducing your tax liability, it’s only when you sell those position that you get to offset against gains made earlier. Also, if capital gains rates increase in the future, the losses you book now will become even more valuable in years to come.

Tax-Loss Harvesting

Investors in high federal and state tax brackets should try to offset short-term gains if possible. Short-term capital gains are taxed at an investor’s ordinary income tax bracket, which can change yearly but for some could be in the upper 30 percent range. Long-term gains, on the other hand, enjoy the benefit of being taxed at a 0, 15 or 20 percent tax rate based on income.

Short-term (ST) gains and losses are netted against one another. Then, long-term (LT) gains and losses are netted. Then ST gains will be netted with LT gains and you will end with a final ST or LT gain or loss. It is beneficial to try to end up with a long-term gain rather than a short-term gain due to the disparity (up to 24.6%) in tax rates on short and long-term gains. If you end up with a loss, either short or long term, $3,000 of that loss can be used to offset ordinary income.

The way this tax strategy works is that, if you wanted to take a loss in any asset class, you could sell a mutual fund and replace it with the corresponding exchange-traded fund for 31 days, and then move the assets back. This will allow you to maintain the integrity of your asset class exposure and avoid the wash-sale rule.

Gifting Appreciated Assets

Charitable donations are a well-known tax strategy, but did you know you can gift appreciated assets?

Giving highly appreciated assets to someone in a lower tax bracket or to a charitable organization can effectively reduce or eliminate taxes entirely and remove the asset from your estate. Based on current tax laws if you gift a highly appreciated security to an individual in the 10% or 15% bracket, he or she will only pay 0% or 5% capital gains taxes on the appreciation. The one issue you want to be aware of when gifting to children is the kiddie tax rules, which could have an adverse effect on the above strategy.

If you donate the asset to a charitable organization, you win twice. First, you do not pay the capital gain you incurred, and secondly, you get to deduct the full market value of the asset donated.

Say, for example, you purchased Apple Stock at a cost basis of $10,000 and 6 months later it’s worth $15,000. Let’s assume your total tax bracket is 30%. Donating your stock position could save $1,500 in capital gain tax and an additional $4,500 in ordinary income tax ($15,000*30%).

Identification of Securities Transactions

Identifying different securities transactions is important when you have various lots of the same security bought and sold at different times and at different prices. You may create a tax-planning opportunity if you adequately identify the lot to be sold. Identification allows you to create the amount of gain or loss to be recognized and create a short-term or long-term capital gain or loss. If you do not adequately identify the lot of securities to be sold, U.S. Treasury regulations impose the first-in, first-out method of identification where the securities sold are deemed to be the securities you held for the longest time.

There are more tax strategies than the ones presented in this article. Keep in mind that tax planning is always based on multiple factors. Taxpayers have different goals and are in different stages of life. If you seek the absolute best tax planning, you need to work with a professional tax advisor that will spend the time to understand your situation and build the right plan for you.