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Year-End Tax Planning for Investors
Adam J. Pechin

The end of the year is an ideal time to review your investment portfolio. You want to ensure that it is meeting your objectives and that the mix of assets continues to reflect your time horizon and risk tolerance. It is also a good point to implement strategies for reducing your 2018 tax bill.

Harvest losses (and gains)

There are several tried-and-true tax strategies to consider, starting with harvesting losses. Have you realized net capital gains during the year? Assuming you are in the highest tax bracket and subject to the 3.8% net investment income tax (NIIT), they will be taxed at rates as high as 23.8% for long-term gains and 40.8% for short-term gains.

To soften the tax blow, review your portfolio to see if there are any securities you can sell at a loss to offset the gains. If you end up with a net capital loss, you can even use it to offset up to $3,000 in ordinary income.

In some cases, harvesting gains — or selling securities that have appreciated — may be advantageous. For example, if you have realized net capital losses during the year, you might sell appreciated stock to diversify your portfolio and use those losses to eliminate taxes on the gain. Capital losses can be carried forward indefinitely. Generally, there is no need to offset them with gains simply for tax purposes.

Buy back a losing position

If an investment has declined in value, but you remain confident about its long-term prospects, consider selling it at a loss to take advantage of the tax benefits — and then buying it back. However, be sure you comply with the wash sale rule, which prevents investors from taking a current loss on a security if they buy substantially identical security within 30 days before or after they sell it. So, if you sell a security at a loss, you will have to wait at least 31 days before you buy it back.

There is a risk that the benefits of this strategy will be erased if the security’s price goes up during the waiting period. To avoid that risk, consider replacing your original investment with securities that are similar, but not substantially, to the ones you sold. For example, if you buy stock from a different company in the same industry or bonds from a different issuer, the 30-day waiting period will not apply.

Know your basis

Mutual fund investors have special strategies to consider at year-end. If you sell fund shares, you can reduce your gain or increase your loss by selling those with a higher cost basis. There are several ways to determine basis, but the best way to minimize taxes is to instruct your broker or advisor to sell specific, high-basis shares.

Also, exercise caution when initiating new mutual fund investments. Most funds distribute accumulated dividends and capital gains near the end of the year. However, contrary to popular belief, there is no advantage to investing in a fund just before a distribution. In fact, it will cost you. Sure, you will receive a year’s worth of income shortly after you purchase the shares, but the value of those shares will be reduced by the amount of the distribution. In other words, you will pay taxes on taxable income that provided no economic benefit.

Make other plans

If you plan to make charitable contributions this holiday season, consider donating appreciated publicly traded stock. When you sell the stock and use the proceeds to fund a charitable contribution, you will owe capital gains (and possibly NIIT) on your profits. But, if you donate the stock directly to a qualified charity, you will avoid those taxes while still enjoying a charitable deduction equal to the stock’s market value, subject to certain restrictions.

Year-end is also a good time to review your portfolio’s asset allocation and correct any imbalances that have developed. One way to avoid the tax costs often associated with re-balancing your portfolio is to use tax-advantaged accounts, such as IRAs or 401(k) plans. Suppose, for example, that your portfolio has become too stock-heavy. To correct this imbalance, you might sell stocks held in retirement accounts and reinvest the proceeds in taxable bonds, with no current income tax consequences.

Take stock of your situation

In most cases, year-end tax considerations should take a back seat to long-term goals and sound investment principles. Nevertheless, do not overlook the impact that taxes can have on your investment returns. Consult your ORBA advisor before making any major buying or selling decisions.

Sidebar: Tips for tackling the NIIT

If your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 for joint filers and $125,000 for married filing separately), you may be liable for the 3.8% net investment income (NII) tax. Generally, the tax applies to the lesser of 1) your net income from taxable interest, dividends, capital gains and other investments, or 2) the amount by which your MAGI exceeds the threshold.

To reduce your MAGI, your NIIT, or both, you might want to:

  • Defer income;
  • Accelerate expenses;
  • Increase contributions to tax-deferred retirement accounts;
  • Postpone the sale of capital assets;
  • Harvest capital losses;
  • Structure business or asset dispositions as installment sales; and
  • Shift investment income to certain family members in lower tax brackets.

For more information, contact Adam Pechin at [email protected] or 312.670.7444. Visit to learn more about our Wealth Management Services.

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