3 Year-End Tax Moves for Intelligent Investors

It often seems that it's easier to ask for a divorce than to get rid of the losers in your investment portfolio.

Especially since 40-50% of marriages end in divorce while so many investors stay married to their portfolios.

But much like a bad date, you need to cut your losses and move on.

And do it before the end of the year. Because tax loss selling, along with some other portfolio tactics, can save you tons of money.

And you'll need it if you're paying alimony. 

Dump the Losers

This is so hard for so many people.

Because they get emotionally attached.

 Well, don't. 

"Capital losses actually can help your tax situation, especially if you have gains," says Dominic Tavella, founder and president of Diversified Private Wealth Advisors

As a refresher, a capital loss is generated when you sell any investment, like a stock or share of a mutual fund, for less than you bought it. But you can't deduct unlimited losses on your tax return. You only can take a maximum loss of $3,000 each year. So if your total net capital losses are $10,000, the remaining $7,000 can be carried forward and offset again any future gains.

"You want to minimize your gains and maximize your losses," says Jackie Perlman, principal tax research analyst at H&R Block.

So if you have gains, go find some losses.

And if you're struggling to divorce yourself from your loser holding, know that you can sell it and buy it back - in a month.

There is an arcane tax rule called the wash-sale rule. It says that if you sell a security at a loss, you must wait at least 30 days before you can buy back that same security. If you don't, that tax loss will be disallowed.

Here's why: if you sell a stock at a loss today and buy that same stock back tomorrow, on paper, your portfolio is in the exact position you started. But now as a bonus, you have a big ol' loss to deduct on your tax return. Well, Uncle Sam isn't stupid. He's not going to allow that.

So just wait until the thirty-first day and then do what you want.

If you're having relationship withdrawal though and need to be in the position immediately, consider buying a different stock in same sector. Or the sector's ETF. All that is allowable.

Mutual funds are easier. If you're selling a loser mutual fund, you can buy another fund as long as they are not identical (e.g. don't sell a Nasdaq 100 fund and buy the QQQ).

So go through your holdings. And while you shouldn't sell things just for tax purposes, "you can essentially get a reimbursement on your losses," says Tavella. "So why not let the government give you some money back?"

Heck yeah.

Beware of Capital Gain Distributions from Mutual Funds

Because they can hit you unaware. 

When a mutual fund generates income from its holdings or sells shares of stock and receives a capital gain, the fund is required by law to distribute most of that income and gain to its shareholders.

And even though the market has been down, there are a ton of funds sitting on huge gains.

Take the health care sector. The Health Care SPDR ETF (XLV) may be down 6.9% year-to-date, but it is actually up 113% for the five years ending Nov 1, 2015. That can very well mean there are some big fat capital gains distributions lingering there.

And unless that fund is in a tax-deferred account, those distributions will be taxable to you on your 2016 tax return. 

So what do you do? 

Between now and the end if the year, call your fund company or check its site. Many will start publishing details on these anticipated capital gains distributions. Granted, they're generally estimates and could change on the distribution date, but you can still get a sense of whether you're going to have a big tax hit or not.

Or just call your broker or advisor.

"The customer never gets notices," says Tavella, who has been in the business for thirty years. "We make the fund companies give us this information."

And remember, it doesn't matter if you bought the fund six years ago or six days ago. If you are an owner on the distribution date, you get your share of those big fat taxable distributions.

So if the amount is large and you are not happy with the fund anyway, consider selling it beforehand.

If by chance you get a surprise distribution, just be sure to save a percentage of it to pay the taxes, suggests Perlman. 

Invoke Trump And Use Your Carryforward Losses

Trump should not be the only one that gets to take advantage the tax code and carryforward losses

If you or your business had a rough year and you have net operating losses, really think about how you can use them. 

Remember, you can use those losses to offset your income, just like Trump.

"Consider even offsetting them with an IRA withdrawal," suggests Tavella. 

Even if you are under 59.5 and subject to the 10% early withdrawal penalty, it may be worth it if you have a lot of money stashed in your IRA.

So use the tax code to your benefit as well. 

And drop the emotion when it comes to your portfolio. Save it for your waning marriage.

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