By Xavier Brenner If you aren't vigilant, Uncle Sam has a way of taking a big bite out your portfolio. And with 2014 winding down, time is running out for investors to take steps to lower their tax bill next April. So before the buzzer sounds on 2014, here are six year-end tax tips that may help minimize the tax hit to your hard-won returns.
1) Tax Loss Harvesting
It's been a volatile year in the stock market, and you may have some positions underwater. If so, one way to reduce your tax liability is through tax-loss harvesting. The basic idea is to sell losing investments before yearend to reduce the tax liability on capital gains on your winning investments. Should you decide to buy back the security later, make sure you consult with a tax attorney first. The IRS does not allow dumping a stock for tax purposes and turning immediately around and buying it back, a so-called wash sale. There is usually a waiting period depending on the investment involved.
2) Capital distributions
You might also consider checking into whether your mutual funds or ETFs are making capital gain distributions before yearend. Oftentimes a fund manager will decide to sell a stock to lock in profits or to raise cash for shareholder redemptions. In such cases, the fund will then distribute at least 95% of the gains to shareholders and that's a taxable event. If the fund has already delivered robust returns in 2014 and you were considering selling it in 2015, it may make sense to sell before the record date of the that capital gain distribution.
That same advice also holds for dividends. Check out the dates your fund is scheduled to pay out dividends. If you hold a fund that will pay a dividend before December 31, you may want to do some math.