With the market's recent ups and downs, take a good look at your investment portfolio. You may have options to minimize taxes int eh coming months as December 31 approaches. However, don't let the tax impact alone dictate investment moves. Your decision to buy or sell should always be based on sound economic reasoning too.
Note the 0% rate on long-term capital gains. If your income without regard to your long-term gains is in the 10% or 15% tax bracket, profits on the sales of assets owned over a year are tax-free until the gains push you into the 25% bracket. That bracket starts at $73,800 of taxable income for couples...$36,900 for singles. If part of your gain
is taxed at 0% and the rest is taxed at 15%, claiming more itemized deductions or making a deductible IRA payin gives you two tax breaks: The income tax savings from the deduction. And more of your gain will end up being taxed at the 0% rate.
But the 0% rate isn’t all gravy. Even though the gains subject to the rate are not taxed, taking additional tax-free gains will boost your adjusted gross income. The extra AGI can cause more of your Social Security benefits to be taxed. In addition, your state income tax bill may jump, since many states tax gains as ordinary income.
Consider selling laggards in your portfolio. Capital losses offset your gains, plus up to $3,000 of other income. Any excess losses are carried over to next year.
Watch out for the wash-sale rule: If you buy the same security within 30 days before or after the sale, the loss isn’t deductible. Instead, the disallowed loss is added to the basis of the new shares. This rule can come into play if you sell a mutual fund at a loss within 30 days of the date a dividend is reinvested, or if you have your IRA purchase shares that you recently sold at a loss out of your taxable account.
Be wary of buying a mutual fund late in the year in a taxable account. If the fund pays a 2014 dividend after you buy it, you owe tax on the payout this year. But you aren’t any better off financially because the fund’s share price decreases
by a corresponding amount. In effect, you’re prepaying tax to IRS. To avoid this trap, buy the shares after the dividend record date. Ask the fund if it will pay a dividend