Tax laws are ever changing, which can lead to unwelcome financial surprises come tax season for the unprepared. This year, 2013, saw both an increase in the capital gains tax (from 15% to 20%) and – adding insult to injury – a new investment income surtax of 3.8%. Few people will have losses this year due to an appreciating market, leaving them exposed to long-term capital gains as well as this new surcharge on investment income.
Here are 4 key things to watch out for between now and the end of the year:
1. Avail yourself of capital loss harvesting. If you have gains, one strategy is to ‘tax loss harvest.’ Tax loss harvesting entails looking through your portfolio, searching for losses on investments, and selling them to realize the loss. By realizing the loss on investment, you can offset the gains, which will result in minimized taxes. Make sure to see #4 to avoid getting hit by the wash-sale rule.
2. If you’re looking to invest in a mutual fund: wait! If you are an investor looking to get into a mutual fund, it may make sense to wait until the New Year, after the mutual fund has declared its capital gain distributions for the year.
Right now is the time when mutual funds declare their capital gains distributions. So if you invest money into the fund today and the fund declares a capital gain distribution, because you own the fund, you will need to recognize tax on their sales of stock that have held for a period of time; this creates a tax on your investment. Therefore, if you plan on purchasing a mutual fund before the end of the year, it is important to check when the fund will be paying out the dividends it is required to pay out to shareholders annually. The key is to look at the record date for a mutual fund and buy the mutual fund after the record date clears in order to avoid getting hit with a tax bill.
3. Consider quarterly estimated tax payments. For anyone who has capital gains, you may want to consider increasing your quarterly estimated tax payments so that you don’t get hit with a penalty for not paying the right amount of tax. This is particularly important in light of the increased capital gains tax.
4. If you’re selling stocks that have losses, remember the wash-sale rule. A wash-sale is one that occurs when an individual sells a security at a loss, and then, within 30 days before or after the sale, the investor buys the stock back. The IRS prohibits an individual from claiming a loss on a sale or a trade in a wash-sale (especially important for anyone planning on tax loss harvesting).
For more last minute tax tips, please contact us.