Heads up! You might be about to commit a blunder, without even doing anything. I'm talking about taxes, and even though April 15 isn't exactly around the corner, the end of the year is approaching, and there are things you can do now to reduce your tax hit.
For example, you can be clever with your gains and losses. Are you sitting on some hefty gains in some stocks? Perhaps some of these names?
|
Company
|
CAPS Stars (out of 5)
|
5-Year Average Annual Return
|
|
Intuitive Surgical (Nasdaq: ISRG )
|
****
|
51.5%
|
|
Monsanto (NYSE: MON )
|
****
|
30.0%
|
|
National Oilwell Varco (NYSE: NOV )
|
*****
|
19.2%
|
|
Express Scripts (Nasdaq: ESRX )
|
***
|
38.3%
|
|
McDonald's (NYSE: MCD )
|
****
|
19.1%
|
Data: Yahoo Finance, Motley Fool CAPS.
A $5,000 investment in Express Scripts five years ago would now be worth more than $25,000. At a 15% tax rate for long-term capital gains, you'd be looking at a bill of more than $3,000 -- if you sold now, that is.
Rescue dogs
But wait -- you may be able to wipe some of that gain clean by selling some losers. Imagine, for example, that stocks such as the following inhabited your portfolio in recent years:
|
Company
|
CAPS Stars (out of 5)
|
2007 Return
|
2008 Return
|
2009, Year-to-Date
|
|
Huntington Bancshares
|
**
|
(33.4%)
|
(43.6%)
|
(50.5%)
|
|
Eastman Kodak (NYSE: EK )
|
**
|
(13.3%)
|
(67.6%)
|
(38.8%)
|
|
Citigroup (NYSE: C )
|
***
|
(43.3%)
|
(73.4%)
|
(37.1%)
|
Data: Morningstar, Motley Fool CAPS
If you'd parked $5,000 in Huntington Bancshares five years ago, it would be worth less than $1,000 today. A $5,000 investment in Citigroup just three years ago would be worth less than $600 today.
That's a crying shame, yes, but you can put those losses to work in your favor. If you have, say, losses of $10,000, you might sell those losing stocks to realize the losses. And also sell your Express Scripts shares -- or at least enough of them to register a $10,000 gain. You can then offset the gain with the loss, and you'll owe nothing.
The beauty of this kind of plan is that you can wipe out a lot of costly taxes by putting your losses to work.
Strategize
If you've suffered through a rough investing patch and your losses outweigh your gains, you can use those losses to offset as much as $3,000 of income, and then carry forward the rest. Think strategically, though. If you believe some of your winners (or losers!) are likely to surge soon, then reconsider selling, since repurchasing within 30 days will make a sale an unusable "wash sale."
If you're comfortable waiting at least 31 days before repurchasing any of the shares, then selling some or all of your winners might be smart, if you can offset those gains with losses. After a month, if you buy the stock again, you'll be doing so at the current price, and that will be your new cost basis, as opposed to your earlier, much lower basis.
Remember, too, that it's not necessarily an all-or-nothing matter. You might sell just half of a holding and thereby hedge your bets in case the stock surges quickly. Just keep good records, though, for your tax returns.
These moves can save you from paying more than you need to in taxes, now or later. Even using the $3,000 to offset income can be quite beneficial: If your tax rate is 25%, you'll avoid paying $750 in taxes! So don't miss out on this year-end opportunity.
RSS Headlines
Fool UK