Taxes: A happy new year means planning now

Proper tax planning requires a little financial houseclearning before the end of the year. 

Don’t wait until Jan. 1 to start thinking about this year’s taxes, said Carolyn Bigda in Money. Proper tax planning probably means making a few necessary moves now. Consider doing some housecleaning of your stock portfolio, for instance, and take losses on certain underperforming stocks if it helps reduce your tax burden. “Even with the market’s rally this year, the S&P 500 is still down 32 percent from its 2007 peak.” Sell some duds before the end of the year, and you can use the losses to offset this year’s capital gains, should you have any. If you have more losses than gains, you can deduct up to $3,000 of the balance from ordinary income. And if you still have losses to spare, you can carry them over to next year.

“Before you start selling things,” keep in mind that this may limit your short-term buying opportunities, said Charlie Farrell in A Securities and Exchange Commission regulation known as the wash sale rule “basically says that you can’t recognize the loss if you buy the same or a substantially identical security within 30 days before or after the sale.” You can, of course, unload shares of one stock and purchase shares of a similar stock—but “it gets more complicated” if you’re selling shares from a mutual fund or exchange-traded fund. Shares in a new fund can be acquired within the 30-day window, but only so long as it has “different holdings and a different risk profile.” It’s safe, for example, to swap a small-cap domestic stock fund for an emerging markets fund or a government bond fund for a large-cap growth fund.

Buying funds at the end of the year can trigger tax consequences, said John Waggoner in USA Today. “Funds normally tally their capital gains this time of year, and pay them in December or late November.” Fund companies don’t pay the tax on those gains; shareholders do. So if you happen to buy into a fund right before it distributes gains, you’ll owe taxes on “gains you never enjoyed.” Finally, be aware that when a fund pays out its annual distribution to shareholders, its share price drops accordingly. In other words, “the fund’s distribution is not just an extra goodie doled out for your enjoyment.”

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