As the end of the year draws near, our attention turns to decorating, event planning, and shopping for gifts. But as soon as the holiday season has come and gone, the beginning of a new "season" will be marked by the arrival of dreaded pieces of mail - labeled with numbers such as W-2, 1040, and 1099. Tax season is a phenomenon that occurs every year without fail. But there are several steps you can take now, before the end of the year, that could help save you money in April.
One of the most important steps to take in preparation for tax time is to conduct a thorough review of your asset allocation, and than make adjustments where necessary. Market volatility, like we have seen this year, reminds us that a balance portfolio - one that includes stocks, bonds, and cash - provides the best method of managing your risk and returns. In addition to incorporating different types of investments in your portfolio, you should make sure your stock holdings are diversified, and that you have a well-rounded combination of equities, representing a variety of sectors that reflect your investment objectives and your tolerance for risk.
Fixed income investments like Treasury securities and municipal bonds also make up an important part of your portfolio, and can help you lower your tax burden. rebalancing your portfolio may be another way to help offset gains and losses. As a result of the downturn in the stock market and low interest rate environment, many investors may be holding bonds with significant unrealized capital gains and equity investments with unrealized capital losses. Repositioning some of your stocks may provide the benefit of offsetting the gains you can recognize by selling some bonds with the losses you can realize by selling some stocks.
If you decide your portfolio does need to be rebalanced, and you need to sell securities, you need to specify which shares you want to sell. Otherwise, the IRS sill assume you are using the "first-in, first-out" method. This means the first shares you bought are the first ones to be sold. Depending on the price you paid each time you bought the stock, this may or may not be the most tax-efficient way for you to identify the shares you sell.
Given the market fluctuation this year, it's also quite possible that while you may have enjoyed come capital gains early on, you might have also experienced losses as the year progressed. For tax purposes, you can use any capital losses to offset your capital gains on securities you sell. In addition, you can use up to $3,000 in net capital losses to reduce your ordinary income (e.g., wages, interest, dividends) during a single year. after the offset, you can carry forward any additional capital losses to offset capital gains and/or ordinary income in subsequent years.
Getting a head start on tax season can help you to prepare in many ways that may actually save you money when you file your tax return. Before the mad rush of the holiday season gets into full swing, make an appointment to see your tax advisor to discuss some of the steps you can take now to reduce your taxes in the spring.
Editor's note: Jay Torgerson is a financial consultant and accredited asset management specialist with AG Edwards & Sons in Salem. Questions and comments can be directed to him at (503) 881-5353.