The volatile markets have created tax-planning opportunities that you should consider as the year winds down.
Capital Gains/Losses
Your capital losses from the sale of investments will offset your capital gains. If your losses exceed your gains, the IRS allows you to deduct an additional $3,000 against other income and any unused losses may be carried forward to use in future years. For example, if you have losses from the sale of investments, consider selling (if selling makes sense within the context of your goals) investments with gains prior to year-end. The gains will be offset to the extent of your losses.
If you want to recognize both gains and losses in two different stocks, or mutual funds, the sale of each will allow you to offset the gains with the losses. If you really like the stock, or mutual fund, that you sold at a loss, you can repurchase a similar stock, or fund. To avoid the “wash sale” rules you must purchase a similar investment but not an identical one or the loss will be disallowed. When implementing such a strategy, you should also consider any associated transaction costs.
Mutual Funds
With regard to mutual funds, here are a few items that you should keep in mind. Funds usually distribute capital gains every year. The deemed distributions are taxable to the shareholders even though no cash has been received. Call your funds and ask about capital gain distributions for 2002. With this information, you can plan to implement some strategies prior to year-end. Also, if you are planning on selling or buying shares of funds, you need to know the dividend dates. If you are buying, you should purchase shares subsequent to the date. And if you are selling, you should sell prior to the date. With regard to a sale of shares, you also need to consider the different methods available in determining your basis. There are several methods and the method you elect can have a significant impact on the amount of gain or loss you need to report to the IRS.
Charitable Donations
Consider donating appreciated stock or mutual fund shares to a qualified charitable organization instead of cash. If done properly, you do not report any gain on the donation and you receive a charitable deduction equal to the fair market value of the investment. If you are considering donating an investment that has declined in value, sell it first, and donate the net proceeds, that way you will be able to deduct all or part of the loss in the year of the sale and receive a charitable deduction for the cash contributed.
