year end tax planning - with investment or retirement plan....

enquiringmindDecember 5, 2006

hi - its almost year end and I just thought about tax planning for this year and next........

through some flyers came with my mail and there is advice about 'consider selling investments or buying stocks before 2007 to offset capital gains / losses.' but without any details..... so my question to you financial experts is.... under what situation one should sell their investments , and when should one buy stocks to properly plan for this tax year (2006) and next .... I do not have a big portfolio, but I figured - any tax money saved is my investment earned ..... thanks for your thought !!

Oh yes - you all have a Merry X'mas and a very Happy New Year...

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There are a number of answers to this, depending on your situation, but, if you have only modest investments, it's usually not something that will make a lot of difference to you. One example would be if you had one stock that went up a lot and you wanted to sell at a profit, and another one that went down a lot and you wanted to dump it. The strategy behind this is to approximately balance out the profit and loss in the same year so that the tax impact is minimal or nil.

You also have to be careful buying mutual funds right now because they usually pay out taxable gains at this time of year; if you buy a mutual fund just before it pays out, you'll be taxed on the gain even if you only owned it one day before the annual payout.

There are other things involved in this kind of strategizing, but hopefully this will get you started thinking.

    Bookmark   December 5, 2006 at 2:22PM
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If you sold a stock(s) earlier in the year at substantial profit and you have a stock or stocks that is/are worth less now than when you bought it/them, and you don't consider it wise to continue to hold it/them, perhaps sell it/them before the year end to offset some of the capital gain that you made on the one that was sold earlier.

In some jurisdictions you can carry a loss back a couple of years, or forward, to offset capital gains made in earlier years - or later.

I'm not big on buying and selling stocks: I've bought some (quality ones) twenty and thirty years ago that I still hold.

If a stock that you own has a history of volatile pricing, and you think that the price is unusually high right now, you might choose to sell now, with a view to buying back later, at a lower price (and there'll be two commissions to pay, in any case). Trouble with that is - how far is down? Maybe later the train will have left the station before you choose to get on. Not many of us have wings to enable us to catch it at a station down the line.

Hope this helps.

Come back to ask us more specific questions, if you like, as it's hard to know what fields of the broad financial system that you are interested to explore at the moment.

Stockbrokers like to have you trade ...

... for if you just buy and hold for a long time, they don't make any money in the interim.

Except that one broker that I use charges me $125./year for carrying an inactive account and my broker says that there's nothing he can do about it - I'm going to close it, as others don't.

Some years ago one broker wasn't charging me an annual fee to administer my self-directed tax-deferred retirement account, but when I had to reverse it into the payout (and no more inputs) section, they were starting to charge an administration fee. So I asked around and found a couple of other carriers who were willing to administer it without an annual fee - carriers whom I was less enthused about using, but I didn't feel it necessary to disclose that piece of information to the current carrier. The carrier said that they could administer it without a fee, as well - and have been doing so, for the last seven years. As a matter of fact, they'll be sending me my annual cheque in a couple of weeks. Guess I'll have to start thinking about what to do with the money, huh? Yeah, right - just before Christmas?

Learn how to manage your money effectively, for you, rather than the other guys - it's an interesting hobby ... **that pays well**!!

If you don't choose to boss your money - it'll boss you.

ole joyful

    Bookmark   December 5, 2006 at 6:46PM
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kudzu9/joyfulguy , thanks for the follow up.... some more stupid questions..... first of all - let me paint a scenario so I can be clear with my questions....
Various stocks were traded throughout 2006 within my portfolio, and there is small overall cap. & dividend gain after commissions and fees.
Now is mid. Dec/2006, and there are 3 stocks left in the portfolio, 'A' is a 'gain value stock', and 'B' is at a 'loss value stock' , and 'C' is about even......
As I need to report the small cap. & dividend gain for this tax year .... here are my questions:
1 - should I keep the 'A' stock in my profile as I don't need to report its gain as long it was not sold and become an actual gain... right ?
2 - should I just sell the 'B' stock just before year end to balance the small cap. gain ? and if I buy 'B' back after Jan 01 to keep my portfolio about the same as before year end, is there a penalty for buying back the same stock within a week crossing the year end/beginning just for tax planning purpose?
3 - for the transaction to be counted as this 2006 tax year, should I observe the 3 settlement days rule ? ie: the buy/sell transaction should be done on or 3 work days before the last trade day of the year.
thanks for your comments so far.....

    Bookmark   December 5, 2006 at 7:52PM
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I'm not sure what you mean when you say "As I need to report the small cap and divident gain for this tax year". But if you mean that you need to report dividends paid to you as income, yes that's what needs to happen. You don't have to report the gain on A until you sell it.

To help you with deciding the scenarios you describe:

#1 - if you still like the stock, keep it. You are right in that the gain isn't recognized until you sell.

#2, what you describe is a "wash sale" and here are the IRS rules:

"In general you have a wash sale if you sell stock at a loss, and buy substantially identical securities within 30 days before or after the sale.

Example: On March 31 you sell 100 shares of XYZ at a loss. On April 10 you buy 100 shares of XYZ. The sale on March 31 is a wash sale.

The wash sale period for any sale at a loss consists of 61 days: the day of the sale, the 30 days before the sale and the 30 days after the sale. (These are calendar days, not trading days. Count carefully!) If you want to claim your loss as a deduction, you need to avoid purchasing the same stock during the wash sale period. For a sale on March 31, the wash sale period includes all of March and April."

Your loss will be disregarded for tax purposes if you do what you describe.

For #3 - the date that matters is your trade date - the date you committed to the transaction. The settlement date doesn't matter to the IRS when defining ownership.

Hope this helps.

    Bookmark   December 5, 2006 at 9:29PM
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