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Year-End Tax Moves for Investors

Reprinted with permission from Inc.com.

In addition to tax-smart moves you should consider locking in for your business before 2013, now is the time to review your personal portfolio. Here are four tactical tweaks you might want to consider ahead of potential tax hikes next year.

Book gains in 2012.

The maximum tax hit on long-term capital gains this year is 15%. On January 1 this tax is scheduled to rise to 20% (23.8% if you’re in the crosshairs of the Medicare surtax). You never should base an investment decision solely on taxes, but if you’ve been thinking about making a portfolio change, or selling an asset, maybe this is the motivation to get it done before year-end.

A quick gut check on whether it’s time to sell an investment:

  • Would you buy the investment at today’s valuation?
  • Does it still fit your strategy?

Even if the answer to both is yes, you might still consider selling… and immediately repurchase what you just sold. The 30-day wash-sale rule doesn’t apply to investments you sell at a gain. You are allowed to immediately sell-buy roundtrip any investment that you’ll book a gain on. The advantage is that you’ll pay a top capital gains tax rate of 15% in 2012 on the shares you just sold, and then establish a new cost-basis for the re-bought shares. This strategy works best the shorter your expected holding period (after you repurchase). It’s worth having your tax pro run through some scenarios to decide what makes sense for your particular situation.

Hold off on losses.

It gets a little trickier if you have investments currently underwater. Losses can be used to offset gains. But if your losses exceed any gains for a given tax year you can then deduct up to $3,000 of your losses each tax year. That $3,000 might be more valuable next year if you are in a higher tax bracket. If your loss is more than $3,000 you carry that forward into the next tax year (and the year after…) and use it the same way. The one caveat here is if you are going to book any gains in 2012. If that’s the case, you and your tax pro can discuss whether it makes sense to also book a few losses to offset those gains.

Maximize your tax-advantaged retirement savings.

Like any 401(k) participant you can contribute up $17,500 in the form of an employee contribution in 2013 into the entrepreneur’s version: the Solo 401(k). But as the employer you’re also allowed to give yourself a profit-sharing contribution of up to 20% of your employment income. The combined value of both contributions is capped at $51,000 in 2013 ($56,500 if you are at least 50 years old). That’s all tax-deductible, and the money grows tax-deferred. 

Or you and your tax pro might talk through whether you want to open a Solo Roth 401(k): Current contributions are made after-tax, so there’s no immediate tax break. The payoff: tax-free withdrawals in retirement. Yes, tax free.

Park income and dividend investments in the right place.

The flat 15% tax on qualified dividend income is scheduled to expire at year-end and revert to the old system in which dividends are taxed at whatever your income tax rate is. For some investors that could mean north of 40%. If that tax change plays out, that raises the value of owning dividend-paying stocks (and interest bearing investments that have always been taxed at income tax rates) inside your tax-deferred retirement accounts.


The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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