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Articles: Taking year-end investment action

The end of the year is often the optimal time to examine your investments.  This review may enable you to reduce your current tax liability while repositioning your portfolio for the coming year.  Here are several year-end investment moves to consider:

Review your portfolio.  This may be a good time to adjust the various percentages of different types of investments among your holdings.  For instance, if one investment class has declined in value, it could represnt a lower percentage of your portfolio than you intended.   Contemplate buying opportunities for that class and/or selling opportunities for other assets.  In any event, you might rebalance your portfolio before December 31. Caution:  Asset allocation techniques do not protect against losses in a declining market.

Harvest   tax  losses.     Your  capital gains for the year offset capital losses and vice versa.  In addition, excess capital losses can offset up to $3,000 of  ordinary  income  in  2010.    If  you have realized capital gains from securities sales earlier in the year, you might recognize capital losses at year-end to offset those gains.  Of course, tax implications should not be the sole reason for transactions, but they are a significant incentive.

Avoid  the “wash  sale”  rule.  The wash sale rule prohibits you from claiming a tax loss on the sale of securities if you acquire substantially identical securities within 30 days of the sale.  To avoid complications, wait at least 31 days to buy back securities you have sold at a loss.  If you believe certain securities are poised to rebound right away, you might acquire more shares first and then wait at least 31 days to sell the original block of shares.

Calculate your tax “basis”. Your basis for tax purposes is generally your original acquisition cost plus certain adjustments, such as commissions.  Note that you may use an average costs per share for mutual funds or stocks when you own multiple shares.  Alternatively, you might identify
certain shares as the ones being sold (see box below).   Astute planning at year-end may increase a taxable loss or decrease a gain to your benefit.

Give gifts  of securities to a qualified charitable organization.   Charitable gifts at year-end can reduce your current tax liabilitiy.  If you give away appreciated securities, you can generally deduct the fair-market value of the securities if you have held them for more than a year. Otherwise, your deduction may be limited to the cost of the securities.

Consult your professional advisers concerning all the ramifications of these investment moves.

Beginning next year, financial institutions must provide the IRS with your tax “basis” for securities’ sales.  But these new reporting rules are being phased in over three years.  They take effect

  • for corporate stock shares acquired after 2010
  • for stocks in a mutual fund or dividend reinvestment plan acquired after 2011
  • for other securities acquired after 2012

Caution:   Do not discard your tax records just yet.  For instance, the records may be needed to establish your basis for stocks and mutual funds acquired before 2011.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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