Year end tax plan

Since it appears I've exhausted the minimum wage lunacy, I thought I would offer up some tax advise regarding capital gains. I read an interesting piece in a year-end tax planning article about matching capital losses against capital gains.

The conventional wisdom when it comes to year end tax planning is to match any gains you might have against any losses thus "netting" out any capital gains against capital losses and thereby avoiding any capital gains.

I have a slightly different take on this planning technique. I always preach that most people would rather pay taxes on gains than deduct losses. Therefore, as you look through your investments I believe the question that should be asked about each and every investment you have is; "Is there a place where I could better have this money invested".

If the answer is yes you should reinvest it and move it to the investment you think is better... regardless of gain or loss.

An example. Assume you have a stock (let's call it XYZ Co.). the current market value of the stock is $2,500 and you believe that this value is about all this stock is going to do.

Let's also assume that you have a gain of $1,000 in the stock. You might hesitate to sell it because after capital gains tax you are left with a net of $2,300 (15% federal tax, 5% state tax on the gain).

However, let's assume you wait to sell it until February. Now the stock is worth $2,300. However, your investment is now only going to net you $2,140 after tax.

You just lost $160.00 do to the market swing you could have avoided in December.

Conversely, assume you have an investment worth $5,000 but you have a $2,000 loss imbedded in the investment. Many people will tend to want to hold on to the investment in order to recapture the loss on the stock. I would offer that if the stock is a dog and you have little hopes of getting that market value back, cut your losses and move the money into something with some up side. I'd rather see a taxpayer with a $2,000 loss on your tax return then waiting and having another $1,000 - $5,000 loss in the future.

Obviously, you'll never know what the ultimate point to sell will ever be but my point here is that investor should always be evaluating their portfolios independent of the capital gain or loss not yet realized. Work with your advisor periodically and see if they have any opinions as to the future gain or losses in your investment(s).

If you need further clarification about this feel free to call me. I can give you some better information as it pertains to your personal situation.