A PENNY SAVED IS A PENNY EARNED
With only a few days left of Channuka, and just the thought of eating another Sufganiya making you sick, it must mean that the end of the year is right around the corner. With time running out on 2018, now is the time for investors to make some portfolio adjustments that can create tax savings and get their portfolios ready for the upcoming year. This year has been incredibly volatile for investors. Markets surged, then dropped, surged again and have now been in a tailspin for 2 months. What that means is that there is a good chance that you have either gains or losses in your portfolio. Whether you have realized gains or losses in your portfolio, some tactical moves now can end up saving you thousands and thousands of dollars. Here are some tips to make your portfolio more tax efficient as well as make sure that it still matches the investor’s goals and risk tolerance levels.
Profit from Losses
If you have sold positions and now sit with capital gains, review your portfolio to see if you have any positions that are currently at a loss, and with the way markets have been of late, there is a good chance that you have some. While many investors would never consider selling a position that is losing money, selling your losers can actually make you money. Never think that all is lost. Some good can actually be derived from losing stock positions. When the position is sold, the investor realizes the loss, which has certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill. In fact, for many investors, tax-loss selling may be the most important way to reduce their tax bill. If done correctly (be sure to speak to your accountant before making any trades), it can save significant amounts of money. For example, if a person has a gain in Stock A and she decides to sell it, she will be taxed on that gain in full. But if she has a loss in Stock B that she actualizes by selling, she can use the amount of the loss and offset it against the gain in A, drastically reducing the taxes she owes. This might not recover the entire loss, but it certainly cushions the blow. You can work with a firm that provides online bookkeeping to not lose track of your situation, which will considerably improve your decision making capabilities.
Conversely, if you have substantial losses from previous years, you should speak to your accountant at once to see if it pays to sell positions that have gained in value, in order to cushion any future tax bill. By doing this, the investor can actually reset their cost basis at a much higher level, without incurring any tax liability. You have until the end of the year to implement these strategies, so if you have yet to do so, the clock is ticking.
Wash-sale
There is a rule in the US, called the Wash-sale rule, where the IRS disallows a loss deduction from the sale of a security if a ‘substantially identical security’ was purchased within 30 days before or after the sale. Let’s say that you sold 100 shares of Facebook on November the 28th at a loss and buy back those 100 shares of Facebook on December 15th, the loss deduction would not be allowed . The wash-sale rule is designed to prevent investors from making trades for the sole purpose of avoiding taxes.
A new reality
Much has changed in the world over the last year. When looking at your portfolio to try and offset gains and losses, take a few extra minutes and make sure your portfolio is well positioned for current conditions. One of the most overlooked aspects in long-term investing is the need to rebalance a portfolio. Rebalancing is important for two main reasons. First of all, it keeps your portfolio in tune with your long-term goals and second, it keeps your asset allocation in line with your risk level.
Speak with your accountant and financial advisor in order to fine-tune your portfolio before year’s end, to make sure that it is both efficient from a tax perspective and properly allocated from the investment side.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email aaron@lighthousecapital.co.il.
