Don't Let This Be the Most Wonderful Time of the Year for Uncle Sam
Stock-Markets / Stock Markets 2014 Dec 24, 2014 - 06:48 PM GMTBy: Investment_U
Marc Lichtenfeld writes: Hopefully, your portfolio had a good 2014. The S&P 500 is up 12%. If you followed The Oxford Club, you likely did better. In 2014, The Oxford Club gave subscribers 122 double-digit gains and another 109 triple-digit winners.
Whatever the case may be, you likely cashed out some profits in the market this year. Those profits are classified as either long-term or short-term gains. Long-term gains are positions that were sold a year or more after you bought them. Short-term gains are positions entered and exited within one year.
These are important distinctions because you will be taxed differently depending on your holding period.
But as we often say at The Oxford Club, it’s not how much you make, it’s how much you keep. Take the following steps to keep as much as possible and reduce the taxes on your gains.
- Long term or short term - Most brokers allow you to go online at any time and see what your gains and losses are, both open and closed. Your broker will also classify them as long term or short term. This is important because long-term gains are taxed at 15% (for most investors) while short-term gains are taxed at your ordinary income rate, which is likely considerably higher. Write down your realized (closed) long-term and short-term gains separately. Your open or unrealized gains are not taxed until you close the positions.
- Offset those gains - The Internal Revenue Service (IRS) allows you to offset those gains with losses.For example, let’s say you have $5,000 in long-term gains. If you have a stock that is down $5,000, you could sell it and the gain and the loss will cancel each other out and you won’t owe any taxes. Long-term losses are used to offset long-term gains and short-term losses offset short-term gains, so be sure to try to match up your gains and losses for the most tax efficiency.
- Take a $3,000 loss carryforward - If you have $3,000 more in losses than in gains, you can take an additional $3,000 off of your ordinary income. If your losses exceed your gains by over $3,000, the additional losses can be carried forward to future years, up to $3,000 per year.
- Contribute to an IRA or 401(k)- If you’re eligible to contribute to an IRA or 401(k), make a year-end contribution. Some employers allow you to alter your 401(k) contribution, so making a bulk contribution before January 1 not only helps you save for retirement, it will lower your taxable income in 2014.If you’re contributing to a traditional IRA, you have until April 15, 2015, to count it toward your 2014 taxes. A Roth IRA contribution will not alter your taxes this year, but you won’t pay tax on the money when you take it out.
Keep in mind, you never want to sell a potentially profitable investment strictly to offset a gain. But if you have losers in your portfolio that you’ve lost confidence in, consider selling them before year end so you can lower your 2014 taxes. If you wait until January, it will affect next year’s tax return.
These rules don’t apply to stocks in your IRA or other tax-deferred accounts. Since those gains are not taxed until you withdraw the money, there is no reason to offset the gains in the current tax year.
Taxes are a complicated issue. Be sure to talk to a tax professional about your specific situation.
While this time of year is often spent focused on family and friends, it’s important to make sure you take care of your finances before year end. That way you can give the IRS a lump of coal in April.
Good investing,
Marc
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