End of 2017 tax planning I Insightful Investing


Last updated 11/8/2017 at Noon

Here are a few end of year tax planning ideas. Some of these ideas are very familiar and perhaps some are not.

My primary business is investment advice, and not taxes, yet I do know some tax strategies that may help you keep more of your own money. Consult your tax expert before taking any action.

1. Consider a Roth IRA. If you have maxed out your 401(k) for the year, consider contributing to a Roth IRA. The Roth IRA is an account the government allows some people to contribute to. The benefit of a Roth account is that the distributions are never taxed as income. This is because you contribute to a Roth IRA with after taxed dollars, unlike a normal IRA, where the contributions become a tax deduction. The greatest portion of the distributions are taxed. There are some cases where IRA contributions are not taxed. Specifically in cases where the contributions were made with after-tax dollars. There are limits as to who can benefit from these plans, so consult an expert.

2. Consider a Health Savings account. This is a great way to put money aside for medical expenses with pretax dollars. I have great medical benefits, as my spouse is a government employee, but my dental benefits are meager. The Health Savings account can be used for dental, vision, long-term care and other types of medical costs.

3. Use tax loss sales in a year where you have realized capital gains. Be sure to watch out for the Wash Sale rule.

This something you should consider in a year when you have a realized Capital gain and unrealized capital losses. Capital gains are taxed in the year they are realized, unlike capital losses. Without getting super technical, when a capital loss is by itself, you may only offset $3,000 a year against your ordinary income. You may, however, offset a capital loss against a capital gain.

Before we get into the “Wash Sale” rule, let’s take a look how simple capital gains and losses work.

For example, let’s say you make $100,000 a year and you sold a stock on which you lost $10,000. Your capital loss needs to be spread out over three plus years. So for the first year your taxable loss of $3,000 would offset against your ordinary income making it $97,000. And you would have $7,000 of loss to carry forward. And this is repeated every year until the loss is completely used up.

There are other combinations. Let’s say the following year you sold a stock on which you made $5,000. Since you carried forward $7,000 from the previous year, you could offset the $5,000 gain with the loss. This would result in having no capital gain tax on the $5,000 and you could then take the remaining $2,000 of loss against your ordinary income. Making your taxable income $98,000. In this situation you have used up your taxable loss.

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The “Wash Sale” rules works this way. Many people try to balance their gains and losses at the end of the year. The tax code will allow you to offset gains with losses as long as you do not repurchase the stock you are selling at a loss within 30 days.

Let’s say you have a stock that has a loss in it, but you like the stock and don’t want to sell it. How can you use this technique to realize the loss and keep the stock at the same time? Buy more. If you have 100 shares of a stock with a loss, then buy an additional 100 shares of the same stock. This establishes a new basis for the stock and then, 31 days later, sell the 100 shares that were first purchased that have the capital loss. Since you owned the second lot of stock for over 30 days, this does not trigger the “Wash Sale.” These losses may then be used to offset any realized capital gains. The end result is that you keep the stock that you wanted to keep and take advantage of establishing a new cost basis. And reduce your capital gains tax.

I am not a tax expert. Keep in mind that the tax laws are complex and you should get good advice from qualified experts before taking any action.


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