Renowned financial advisor offers year-end tax planning tips
NEW YORK, Dec. 5, 2013 /PRNewswire/ — Best-selling author, Forbes contributor, and renowned financial advisor Phil DeMuth says, "Everyone talks about selling losing stocks at year-end to harvest losses for tax purposes, with U.S. stocks up over 25% so far in 2013, losing positions can be hard to find. There is still one trick investors have to protect themselves from higher tax rates. It's called Capital Gains Distribution Avoidance. Annually, mutual funds are required to pass along their realized capital gains to shareholders. Sell your fund before the ex-dividend date. Side-step taxable distribution. Let other shareholders have the pleasure."
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Distributions usually happen in December. You only miss out on the taxes. The fund's price falls exactly by payout amount. After selling, they switch to a similar fund that is not making a capital gains distribution or wait a day to buy it back again. "Go to the fund's website to find out the size and date of the distribution. Check your cost basis to make sure you would not realizing capital gains in selling that would offset the benefit," DeMuth states.
If investors do realize a loss on shares sold, they cannot buy the fund back within 30 days or switch into a fund that is substantially identical to avoid getting tripped up by the tax rules. Become a tax-avoiding ninja:
Checking Account Tax Settings
Most brokerages put you in "average cost basis" or "first in-first out" accounting when calculating capital gains. Newer and better options have appeared – tell them which you want. Look for "tax optimized" or "best tax" or "short-term tax-sensitive." They'll scan individual tax lots when selling and select the ones with the least tax consequences.
Harvesting Hidden Tax Losses
Even with a net long-term gain, there may be individual tax lots you bought at a higher price. This holds where you have been reinvesting dividends and capital gains in mutual funds over time. Go online and examine them. Specify you are selling the ones that are underwater. Look closely at your commodity, precious metals, bond, and emerging market funds.
About Phil DeMuth
DeMuth's first solo endeavor is The Affluent Investor. He's co-authored nine bestselling books with economist Ben Stein (including the Yes, You Can series Yes, You Can Get a Financial Life, Still Retire Comfortably, Supercharge Your Portfolio, Time the Market, Become a Successful Income Investor, Can America Survive?) and "The Little Book of Alternative Investments and Bulletproof Investing…" series). Both a psychologist and registered investment advisor, he's written for The Wall Street Journal, Barron's, the Journal of Financial Planning, Human Behavior, Psychology Today, and the Louis Rukeyser Newsletter. He's been quoted in The New York Times, Fortune magazine, Yahoo! Finance, theStreet.com, On Wall Street, "Profiled for Success" in Research Magazine, hundreds of outlets, and CNBC, Forbes on Fox, Fox & Friends, FBN, Bloomberg, WEALTHTRACK, and Wall Street Week with Fortune. He's Managing Director of Conservative Wealth Management LLC, a SEC-registered investment advisor to high-net-worth individuals, their families, and foundations.
Articles can be found at http://www.forbes.com/sites/phildemuth/
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