End of Year Investment Strategies

By on December 3, 2018

While the April 15 tax deadline might seem far away, the end of the year will have bearing on your investments and tax liability. Now is the time to consider and implement the following investment strategies to help boost your 2018 tax returns. The U.S. tax code provides plenty of opportunities for taxable investors to keep more of their investment returns.

Investors need to be careful when purchasing funds at the end of the year in order to make sure they are not buying into a tax liability, which can occur as a result of a fund’s capital gains distribution in December. Review your taxable investments and implement strategies to increase your long-term, after-tax rate of return.

Offsetting Taxable Gains with Tax-Loss Harvesting

The stock market has had a strong year which is good news for investor bank accounts but not so good when it comes time to pay capital gains taxes on 2018 returns. One way to reduce the amount investors owe to the IRS is to engage in tax-loss harvesting whereby you offset gains by selling off stocks which depreciated during the year.

Tax-loss harvesting is the method of selling stocks or securities which have lost value to help reduce taxation on capital gains on well performing portfolio positions. Do you have a capital loss that could be booked and used to offset future tax liabilities? For example, an investor with a $5,000 gain can offset their taxable investment income with a $3,000 loss for a net gain of $2,000. In a 15% capital gains tax bracket, the investor only pays $300 in taxes versus $750 taxed on the $5,000 gain alone.

Investors who have taxable accounts should look at their portfolios and Schedule D tax worksheets every December to see if there are any capital losses that might be carried forward or realized to offset potential capital gains distributions, a rise in the capital gains rate or tax liability in the future. Typically, you should harvest losses only from depreciated assets that you were considering selling anyway, perhaps because they no longer fit into your diversified portfolio or because you anticipate that they will continue to decline in value.

Note: Investors who have a loss carry-forward from a previous year should still harvest any current losses to offset any future gains that are made in the stock market or real estate.

Additional End of Year Investor Tips

Avoid the Wash Sale Rule

Make sure your tax-loss selling conforms with the wash-sale rule, a tax law which will disallow a loss deduction when you recover your market position in a security within a short time before or after the sale. In other words, an investor cannot sell to claim a loss before the end of the year and turn around to repurchase or regain their position within a 61 day period.

The actual wash-sale period is 30 days before to 30 days after the date of the sale regardless of the end of a taxable year. For example, selling a security on December 25, 2018, and repurchasing the same security on January 8, 2019, will disallow a loss.

Sell Winning Assets

Many retirement investors who were pushed into higher tax brackets because of distributions from their non-Roth retirement plans, may now find themselves in a low tax bracket and eligible for a tax on capital gains if they converted their pre tax retirement assets to Roth IRAs in previous years. Sell appreciated assets in order to fund living expenses over the next couple of years as capital gains rates are expected to increase in the future.

Donating Winning Assets

It is more appealing than ever to gift appreciated assets to someone in a lower tax bracket or charity to effectively reduce or eliminate tax liability from your estate. Depending on the individual’s tax circumstances the individual or charity may not be liable for capital gains assessments. Beware of donating appreciated stock to children (as this may increase their tax liability).

Auto Rebalancing

Your investment portfolio is likely overweight with appreciated stocks.This may be fine, but keep in mind that the risk involved with reaping large returns. Set your portfolio to auto rebalance investment positions according to set percentages and tax liability to keep risk in check.

Consider rolling ordinary income-producing investments into tax-deferred accounts to defer income gain until later, and thus avoid the immediate impact of higher tax rates on investments. And place stocks which are projected to earn long-term gains into taxable accounts.

Boost Contributions to Your Retirement Accounts

The government allows individuals to save pre-tax money placed in qualified retirement accounts before the end of the year. Investors can max-out or contribute additional funds equal to their capital gains to offset their overall tax liability. Review the following contribution limits with your financial advisor to ensure you are keeping as much of your well-earned money as possible.
2018 Retirement Account Contribution Limits

Retirement Account Contribution Limit Catch-Up Contribution Limit (if age 50 or older)
401 (k), 403(b) and 457 $18,500 $6,000
SIMPLE IRA $12,500 $3,000
SEP IRA 20% of net income(or 25% of compensation) up to $55,000 None
Individual 401(k) 20% of net income(or 25% of compensation) plus $18,500, up to $55,000 $6,000
Traditional IRA and Roth IRA $5,500 ($6,500 for 50 years old and above) $1,000

Minimize the Impact of Taxes on Your Investment Portfolio

Proper year-end tax planning will allow investors to lower their tax liability and keep more of their investment returns. If you have accumulated a capital loss, your portfolio will be much more tax efficient in the future. And if you have capital gains there are ways to legally offset earnings or convert gains into tax advantaged accounts.

Speak with your trusted financial advisor, investment consultant and tax preparer before making any moves to cut your tax liability.

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