Tax Strategies for Minimizing Losses on Stock Investing

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Tax Related Gains from Investment Losses “Tax strategies” and “minimizing losses on stock investing” are two concepts not typically seen together in the same sentence, as one usually has little influence on the other. What is lost on stock investments is lost; however, how that loss is used can be strategically advantageous on the taxable income bottom line. Making the Most of a Loss Because the Internal Revenue Service (IRS) considers stocks, bonds, and gold/silver/precious metals to be capital or capital assets, losses incurred in the buying, selling, trading, or liquidation of those assets can be used by subtracting them from gross earnings. This lowers the earned income total and the related tax rate as well, according to the IRS. If the capital losses exceed the capital gains, the amount of the excess loss that can be claimed is limited to $3,000, or $1,500 if married and filing separately. If the net capital loss is more than this limit, the loss can be carried forward to later years. To determine the amount carried forward, use the Capital Loss Carryover Worksheet in IRS Publication 550. Matching capital gains to capital losses may take advantage of the losses by selling off shares and using the losses to offset the gains, prior to tax time. Diversification to Hedge Losses There are two generally accepted methods of investing; the first is diversification, the second is separate brokerage accounts. To relate diversification to general terms it means to hold a variety of stocks in one account i.e. a mutual funds account; the second would mean to have a separate account for each holding. Diversification in the manner of mutual funds gives the tax deductibility of investment expenses, which makes them more favorable than separate brokerage accounts. Taking the deduction of investment expenses against the mutual fund’s income, prior to distributing this income, results in the complete deductibility of investment expenses. However, having separate accounts allows the investment expenses to flow through as a separately reportable item, which an investor can potentially deduct on the itemized portion of their tax return. Unfortunately, the deductibility of these investment expenses is limited to the portion in excess of 2 percent of adjusted gross income. This deduction can be lost if the separate account investor is subject to the alternative minimum tax. Tax Deferred – for Today Many investors looking to decrease their tax liabilities choose to seek out tax-deferred or tax-free accounts. Some popular accounts include company-sponsored retirement savings accounts such as:

traditional 401(k) and 403(b) plans
individual retirement accounts (IRAs)
insurance company annuities

Most of these accounts may be based on a pretax basis or may be tax deductible today, as investment earnings compound tax deferred until withdrawal, thus offering the tax benefit of being in the lower retirement tax-bracket. Be aware that not all employer-sponsored savings plans are deductible. Earnings which accumulate in Roth accounts have stipulations for tax-free withdrawal; they need to have been held in the account for at least five years and the requirements for a qualified distribution need to be met. Tax-Efficient Investments If investing, being aware of the taxes due is a priority; consider tax-managed or tax-efficient investment accounts. These accounts or mutual funds are managed in ways which help reduce their taxable distributions. Investment managers employ a combination of tactics, such as

minimizing portfolio turnover
investing in stocks that do not pay dividends
selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere

When returns on the broader market are negative or stagnant, investors become more aware of the capital gains/losses by portfolio turnover, as the resulting tax liability can offset any gains on the investment. Municipal and Government Bonds Although the interest on U.S. government issued bonds is subject to federal taxes, it is exempt from state taxes. Municipal bond income is also exempt from federal taxes, and may be free of state and local taxes if issued in-state. If sold prior to maturity (and not at maturity) or bought through a bond fund, government and municipal bonds are subject to market fluctuations and may lose their worth upon redemption. Carry Forward the Loss If the capital gains from the accounts are not as extensive to warrant using some of the loss, or all of the loss, in the current year, then carrying forward that loss is an option. Although the benefit is marginal and the paperwork nearly the same for figuring out the loss, it is an option which has long term savings potential. Additional Resources · Ameritrade: http://www.tdameritrade.com/welcome1.html · Vanguard: http://www.vanguard.com National Association of Investors Corporation, Better Investing Magazine article on tax planning and investments: http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/1207cspublic.htm

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