Investor Forum

Return to Article

Your Year-End Portfolio Planning Should Factor In Cap-Gains Change

Tracy Byrnes

Another year, another year-end tax planning piece.

To be honest, not much has changed on the tax-planning front since last year's piece. So, let's focus on an area of change that will have implications for your year-end portfolio planning: Thanks to the coming decrease in capital gains rates, there are some things you can consider to ensure your portfolio takes full advantage of this rate drop.

Divvy Up Your Portfolio

As a quick refresher, starting Jan. 1, taxpayers in the 15% tax bracket will see their current 10% long-term capital gains rate drop to 8% on gains from assets held for at least five years. Taxpayers in the higher brackets will see their 20% long-term rate slip to 18% on assets purchased after Jan. 1 and held for at least five years. Check out this column for details on these decreasing rates.

To benefit from all this, you need to study your portfolio.

If you know that you will be in the 15% tax bracket in 2001, then consider waiting until January to sell any appreciated assets held for at least five years, suggests Tom Pudner, a manager in KPMG's personal financial planning practice in Washington, D.C. Then you'll only owe 8% on your gains. If you have losers, feel free to dump them before the end of the year.

If you're in the higher tax brackets, divvy up your portfolio into three sections before deciding what to do: losers, moderate gainers and big winners.

Losers

Look at your losers. Do you still believe in them? If you do, do you intend to hold those shares for at least five years? If so, then consider selling them in December, and buying them back in 2001. You have to wait at least 30 days to repurchase them or you'll fall victim to the wash-sale rule and your loss will be disallowed for tax purposes. But at that point, you'll be able to report that loss on your 2000 tax return while you've started the five-year clock ticking on your 2001 repurchase. Then, let's hope, when if you sell those shares five years later, you'll have gains and they'll be taxable at the 18% rate.

If you're not willing to be out of the sector for 30 days, because your crystal ball shows a rapid market rebound, then consider making a swap. Sell your loser and buy a stock in the same industry or an exchange-traded fund that covers the sector. So if your tech stock has tanked, sell it and buy shares of the Nasdaq 100 Tracking Stock (QQQ Quote). Swap your mutual funds, too. Sell your sunken tech fund and buy another. Either way, try to wait until Jan. 2 to make the purchase.

Moderate Gainers

If you have faith in your securities that have gone nowhere or are moderate gainers, consider making a "deemed-sale-and-repurchase election" in early 2001.

This election is a pretend sale. It allows you to treat a holding as if you sold it and bought it back the next business day for the closing market price on that date. You will owe taxes on any gains generated from this fake sale and your new tax basis in the securities will be the closing market price on the day you "repurchased" them.

The good news is that your holding period starts over; the bad news is that you'll owe tax, says Pudner. That's why this election is best for securities with minimal gains.

Big Winners

While making the deemed-sale-and-repurchase election generally is not advisable with your winners, you still should hold off selling them until next year.

But if you're overweighted in a particular sector and have loads of losses, or you think you can get more for those shares before year-end, you may consider selling some shares now.

Remember, you need some gains to maximize the amount of losses you can use on your tax return. Your losses are limited to the amount of gains you have plus $3,000. So if you have $10,000 in losses and no gains, you only can use $3,000 of that loss on your tax return. The remainder can be carried forward to use in future years.

But if instead you had $4,000 in gains, you would be able to wipe out that gain with your losses and still get to report another $3,000. In this instance, you used up $7,000 of your total loss. Now only $3,000 will be saved for the future.

Other Year-End Tips

To start, check out last year's all-inclusive tax saving checklist. Then review this recent column for some year-end planning tips for your stock options.

Here are some other tips to ponder:

While I don't condone the use of credit cards (my husband is calling me a big liar right about now), you can charge your charitable contributions, estimated tax bill, medical bills, etc., if you don't have excess cash lying around. As long as the credit-card receipt is dated on or before Dec. 31, 2000, it counts for 2000 even if you don't get the bill until 2001, says Maggie Doedtman, manager of tax training at H&R Block in Kansas City, Mo.

If you plan on showing up at your family's holiday dinner with gifts of $10,000 for all, be aware that the check has to be deposited before year-end, reminds Jim Seidel, editor at RIA, an information provider to tax professionals. Remember, an individual can give up to $10,000 to any person each year without incurring gift tax. But if the check is not cashed before Dec. 31, that gift won't count for 2000. "That means your annual exclusion for the year is gone forever," says Seidel. Consider using a certified check or wiring the money to the person's account by year-end to be safe.

If you've established a flexible spending account with your employer, make sure you use the money before the year is out. These accounts allow you to bank pretax dollars (although some states tax them at the state level) to use for nonreimbursed medical or child-care expenses. The drawback is you lose any money you didn't spend. So get out there and incur some expenses before Dec. 31, reminds Doedtman.

One more thing -- the 1040PC, the condensed version of Form 1040 -- U.S. Individual Income Tax Return created in a format that can be scanned and read by a computer, is no longer being accepted. (Who used it anyway?) Just electronically file, already.

Send your questions and comments to investorforum@thestreet.com, and please include your first and last names. Investor Forum appears Tuesdays, Thursdays and Saturdays.