Sunday, January 12, 2014

Rules on Retirement Withdrawals / Tackling readers' questions about taxes, Social Security benefits and IRA conversions

Karen Damato for the Wall St Journal writes: I've got a hypothetical tax question. Say someone has a tax-deferred account (non-Roth) with a contribution value of $200,000 and a current value of $600,000.  What if the entire $600,000 was placed in a federal- and state-tax-free municipal bond for one year and then withdrawn? Would there be taxes on the $400,000 gain even though it is withdrawn from a tax-free investment?
Glenn Biron
Costa Mesa, Calif.
Sorry, but it isn't possible to escape taxation on withdrawals from an individual retirement account by temporarily investing the money in the IRA in tax-free muni bonds.
"It doesn't matter what is going on inside the IRA. Whatever comes out is going to be taxable" if the account was funded with tax-deductible contributions, says Bill Fleming, a Boston-based managing director for PricewaterhouseCoopers.
If you didn't deduct some of your contributions, part of your withdrawals would be tax-free. But that is strictly a function of the tax rules for IRAs, not the investments in the account.

***

My wife and I are both age 65. We both worked and have our own Social Security benefits. She started collecting her benefits at age 62. I plan to wait until age 70 to start mine. When I reach age 66, can I start collecting half of my wife's benefit as a monthly spousal benefit? If so, would it in any way affect my benefit at age 70? When I start collecting at age 70, can she switch and start collecting half of my benefit instead of her own?
Larry Heimsoth
Thousand Oaks, Calif.
The scenario you outline is indeed a possibility. At your full retirement age of 66 you could file solely for a spousal benefit. While collecting that, you would accrue "delayed retirement credits" that increase your earned benefit by 8% of your full-retirement-age benefit for each year you delay up to age 70. When you started collecting your own benefit at age 70, it would be the same as if you hadn't already been collecting a spousal benefit. And your wife could then start her spousal benefit if it is higher than her earned benefit.
But this may not be the best Social Security claiming strategy for the two of you, says William Reichenstein, a finance professor at Baylor University and a principal atSocialSecuritySolutions.com.
If your wife's career earnings have been a lot lower than yours, it might be more advantageous for you to skip collecting a spousal benefit on her earnings and instead speed up your wife's collection of a spousal benefit based on your earnings, he explains. You would make that possible when you turn 66 by filing for and suspending your benefit. With this approach, as with your initial idea, you would accrue delayed credits while putting off collection of your earned benefit.
The math of maximizing a couple's Social Security can be complex, and a variety of online tools can help. A September 2013 review by The Wall Street Journal gave top marks to Mr. Reichenstein's website and MaximizeMySocialSecurity.com, which both charge fees.

***

We are thinking of converting our IRAs to Roth IRAs. We are both 66 and will wait to collect Social Security until 70. We have to take minimum distributions at 70½. At that point, our income will jump and move us into a higher tax bracket. We don't need the IRA money for income; we just want to pass it down to our three children. Does it make sense to start converting our IRAs to Roth IRAs even with the big tax hit we will take during the conversion?
Richard King
Virginia Beach, Va.
For retirees who don't expect to need to tap their IRAs in their lifetimes, converting some or all of those assets to Roth IRAs is indeed worth considering. By making the change now, you would lower your taxable income once you reach 70½. That might lower the taxation of your Social Security benefits, notes Maria Bruno, an investment analyst in Vanguard Group's Investment Strategy Group.
And down the road, your heirs would inherit accounts from which they would take a stream of tax-free income, rather than taxable income. That would be particularly valuable if their incomes (and tax brackets) are high.
Converting at least some of your IRAs "could provide flexibility now and for the children," says Ms. Bruno, who adds that partial conversions over multiple years could limit the tax pain for you. Before proceeding, I'd suggest having a tax professional analyze possible conversions of varying sizes and the likely impact on your tax bill.
Posted on 4:04 PM | Categories:

Moving 401k money

Over at Morningstar we read a conversation: Moving 401k money
With a change in employer and thus a new 401k provider (Fidleity) is it possible to move ALL the money from the previous 401k provider (Principal) at one time into a money market account at Fidelity and then slowly DCA it into the new funds of theh 401k?

Re: Moving 401k money
01-09-2014, 3:08 PM | Post #3505120
You have to move it inside the new 401K at Fidelity.  Does your employer offer a cash option inside the new 401K?  My own employer only offers a Stable fund, not exactly cash or a money market fund in our 401K.
Unless all the money from your previous 401K is in cash for an extended period of time (months), there is no point in DCA into the new 401K.  If you are sellling low in the previous one, you are buying low in the new one (or vice versa) and it's a net zero effect.

Re: Moving 401k money
01-09-2014, 3:27 PM | Post #3505128
I don't agree that you "have to move" the old 401k to Fidelity.
You have the option of transferring the funds to a variety of qualified providers. 

Re: Moving 401k money
01-09-2014, 3:41 PM | Post #3505132
Usually on rollover the previous provider will liquidate and you specify which fund in your new 401K the money is placed in.  I've not seen a 401K without a money market option or "stable value" option, if you have a "stable value" option that is likely better than a money market.
After that you just have to follow the plan rules for allocation changes.  The 401Ks I have dealt with all let you exchange into and out of the cash/stable fund whenever, but once you buy a different fund you must leave it 31 days or you get blocked from trading.  They are designed for long term buy/hold DCA, not trading.

Re: Moving 401k money
01-09-2014, 4:09 PM | Post #3505145
"don't agree that you "have to move" the old 401k to Fidelity.
You have the option of transferring the funds to a variety of qualified providers"
One can rollover an old 401K to a trad IRA and use any number of providers. 
 But, if the OP want to use his new employer's 401K to rollover his old one to (as he said), then He has to move the money to inside the new Fidelity 401K in as a lump.  He can't have some of it sitting outside the 401K in cash and DCA it into the new 401K.

Re: Moving 401k money
01-09-2014, 5:20 PM | Post #3505168
You have the option of rolling the old 401k into a Rollover IRA [most flexibility] or moving it into new 401k [if the new plan options are great; plan restrictions will apply].
In both cases, you can initially be in the cash/money-market fund [may be stable-value in the new 401k]. But you should quickly restore the allocation of the old 401k, this being just a lateral move.

Re: Moving 401k money
01-09-2014, 7:33 PM | Post #3505208

http://discuss.morningstar.com/NewSocialize/Themes/morningstar/images/icon-quote.gif dragonpat:
"don't agree that you "have to move" the old 401k to Fidelity.
You have the option of transferring the funds to a variety of qualified providers"
One can rollover an old 401K to a trad IRA and use any number of providers. 
 But, if the OP want to use his new employer's 401K to rollover his old one to (as he said), then He has to move the money to inside the new Fidelity 401K in as a lump.  He can't have some of it sitting outside the 401K in cash and DCA it into the new 401K.

The same thing is happening at my employer. I do not believe you can roll the old account into an IRA, as he is still employed with the company. It is just a change in the custodian of the 401k account. They usually move each fund  to a "similar" fund (LCG to LCG, etc). If it is like my new 401k, there is a brokerage account option that is available for a fee. But the benefits outweigh the costs, IMO. Anywho, as dragonpat said, it is a net wash--selling "high" and buying "high," as it were.


Re: Moving 401k money
01-10-2014, 12:49 AM | Post #3505281
http://discuss.morningstar.com/NewSocialize/Themes/morningstar/images/icon-quote.gif Graust:

http://socialize.morningstar.com/NewSocialize/Themes/morningstar/images/icon-quote.gif 
The same thing is happening at my employer. I do not believe you can roll the old account into an IRA, as he is still employed with the company. 
The OP's first sentence is "with a change in employer", which sounds like he is changing employers.  Thus rollover to rollover IRA is an option if he doesnt want everything in the new company's 401k.


Re: Moving 401k money
01-10-2014, 8:34 AM | Post #3505343
If you transfer across asset managers (i.e., Principle to Fidelity), there may be fees associated with each fund transfer, if you can transfer in-kind. If the fee is not a front-end fee, it might be a back-end fee should you choose to ever exchange the fund.
Actually, depending on what funds you are currently invested in at Principle, they may not transfer in-kind to Fidelity at all. This is a common problem with 401K transfers since your former employer's plan may consist of blended or unique funds. That may require a pre-transfer conversion to cash, which based on the OP, that may not be a concern.
For many of us, being out of the market with large sums is an unsettling risk.

Re: Moving 401k money
01-10-2014, 8:38 AM | Post #3505344
The OP said a change in employer, not a change in the 401k provider under the same employer. A rollover to IRA is allowed for the former, but not for the latter.


Re: Moving 401k money
01-10-2014, 11:24 AM | Post #3505404
Sorry if the initial post caused confusion but let me thank you all for your insightful comments.  The hospital my wife works for was sold to another company and their 401K plan was with Fidelity.  The previous hospital owner had Principal as their 401k provider.  So we can either let the money stay with Principal (I think) or move it to Fidelity which offers a variety of mutual funds in this plan (but only a few from Fidelity; e.g. Low Priced and Small Cap).  Interestingly enough, they even offer a number of Vanguard Target funds.  
Thanks again for all the input.  Much appreciated

Re: Moving 401k money
01-10-2014, 1:36 PM | Post #3505450

Fidelity is one of the best plan sponsors and likely has better funds available than the old Principal plan.  The funds included in the plan are mostly up to your company's negotiator and can include the excellent Vanguard and T Rowe Price target date funds as well as wells fargo stable value funds.
Posted on 3:59 PM | Categories:

Best financial apps for the new year

Wicked Local writes: Looking to get financially organized in 2014? Check out these app suggestions, which just might help you keep your resolution. And the best part is, they’re free!

CHECK: This app works to keep you on top of your bills by keeping track of when they’re due and issuing you reminders. It also keeps track of your bank account so you don’t overdraw, and more.
Free for iOS and Android.

MINT.COM: This app from Intuit lets you manage all your accounts – bank, credit card, etc. – in one place. You just input your information, and the app will help you schedule payments, create and stick to a budget, and much more.
Free for iOS and Android.

PERSONAL CAPITAL: This is like having a financial adviser on your phone. It’s similar to the above two apps, but users report it’s quicker and smoother. It also has fun charts and graphs that let you see your money in new ways.
Free for iOS and Android.

TOSHL: If you want an even more visually fun financial app, check out this one. It uses little monster characters to help your track your finances. You can create budgets, keep track of bills and more.
Free for iOS and Android.
Posted on 3:19 PM | Categories:

Do You Need To Panic About Estimated Payments?

Tom Taulli for Forbes writes: For new business owners, the tax rules can be confusing and even overwhelming. Just look at estimated payments.
What’s the point of this?
Well, the US has a pay-as-you-go tax system; in other words, the IRS collects taxes as you earn income. But for those who are employees, the employer will handle this by withholding amounts from your paycheck for federal and state taxes, as well as payments for Social Securityand Medicare.
Yet things may be different for someone who is self-employed. If he or she does not setup payroll, then the IRS will want to see estimated payments for the taxes owed.
Now there are some exceptions. For example, you do not owe estimated payments if:
  • You paid zero taxes last year (say because you were unemployed or your business lost money)
  • You will owe less than $1,000 for the tax year, after accounting for refundable credits and withholding and…
  • The taxes paid will be at least 90% of the tax you owe for the tax year or…
  • The taxes paid this year will be at least 100% of the tax on last year’s return (it is 110% if your adjusted gross income is over $150,000 or $75,000 if you file a separate return)
No doubt, there are a lot of moving parts.  But things can be boiled down to this:  The IRS essentially wants to make sure that — if you owe $1,000 or more — you should pay at least of all of last year’s amount or 90% of this year’s.
But let’s say you don’t do this?  For the most part, the consequences are not severe. You will owe an underpayment penalty, which is an interest charge (and no, you will not be thrown into jail!)
Despite this, it is still a good idea to make estimated payments. Besides saving a few bucks, you will also avoid something that many business owners fall victim too: not having enough money to pay taxes when April 15th rolls around.
So to make an estimated payment, you will need to fill out a simple voucher, called Form 1040-ES, or you can call the IRS to make the transaction. The due dates are on April 15, June 15, September 15 and January 15 (yes, the next deadline is on Wednesday).
The good news is that it is not too tough to come up with the amount for your estimated payments. Of course, a tax app like Intuit INTU -0.5%’s TurboTax makes the process easy. Or, you can use your last year’s return to come up with the number (for more on this, you can check out here for my simple approach).

Posted on 3:17 PM | Categories:

Are You Cheating Yourself From Getting Rich by Making This Common Tax Mistake?

Sean Williams for Motley Fool writes: The changing of the year can mean only one of two things for me: We're nearing one of my favorite days of the year, Super Bowl Sunday; and we're also nearing one of my least favorite days of the year, tax day, on April 15.
For some of us, tax time is unwelcome because it necessitates a payment of extra tax dollars to the IRS, or perhaps because of the time it takes simply to complete our taxes. Because I moved and made some larger purchases last year, my taxes will take longer than usual to complete, and I can't say I'm looking forward to it.
For other Americans, tax time is welcomed with open arms because the vast majority of people will get money back from the government when they file their taxes. Based on figures from The Wall Street Journal in 2011, of the 143 million people who filed tax returns, more than 80% received money back from the government. While getting money back is always preferential, it could be the worst mistake you'll ever make.
Are you cheating yourself out of getting rich?
If you're wondering why, it's because the money the government sends back to you earns no interest while the government is in possession of it. In other words, you're overpaying your taxes and giving the U.S. government a tax-free loan.
Obviously, there is one positive to overpaying your taxes and getting a refund -- it forces consumers to save. Americans are notoriously poor savers, and anything that would help improve the personal savings rate is usually welcome. According to data at the St. Louis Federal Reserve, the personal savings rate as of November was 4.2%, which is well below the 8% to 12% range that dominated the 1960s through mid-1980s. Low personal savings can be dangerous in times of recession, especially when our economy is so dependent on personal consumption to drive GDP.

Source: St. Louis Federal Reserve.
Despite the benefits of saving by over-taxation, I contend that the damage of forgoing investing this extra income can be far greater.
The flaw of forced savings
Utilizing a Bankrate retirement calculator, I made the following assumptions regarding a fictitious taxpayer, John or Jane Q. Public:
  • Our American taxpayer makes the median average income as of 2011, $51,017.
  • This taxpayer gets back approximately 4% of his or her annual salary at tax time each year.
  • This taxpayer sees his or her annual salary rise 2% annually.
  • The stock market delivers an annual rate of return of 8%.
For our experiment with John or Jane Q. Public, I assumed a starting portfolio balance of $0 and that this individual would work from age 25 to age 65, and then retire.
In this experiment, if our tax over-payer simply collected a refund for 40 years and threw that refund into a savings account (which is currently yielding 1% if you're lucky), he or she would have amassed a bit more than $100,000. Because of inflation, that sum of money isn't going to be enough to retire on by the time the person reaches age 65.
Now let's have a look at our predefined statistics. Instead of overpaying on taxes, John or Jane Q. Public invests his or her projected 4% in annual salary into the stock market each year and comes out around breakeven every year when doing taxes. In this instance, Bankrate calculates that our faux taxpayer would have amassed $692,000 by age 65! In other words, by overpaying your taxes and thinking of a tax refund as nothing more than a way to force yourself to save, our example here would be cheating himself out of more than $500,000 in lifetime earnings! That's substantial!
Here's how you fix this problemLuckily, there's a fairly easy two-step remedy to this problem that could put you back on track to retiring comfortably.
The first thing you have to do is to align your tax withholding with what you anticipate earning for the year. This doesn't mean you have to hit the nail on the head, but chances are good you have a general idea of what you'll earn in a given year. Plus, you can adjust your withholding rate during the year if your job situation changes and you make more or less money. By estimating your earnings for the year and aligning your withholding status on your W-4 to match that estimation, you'll give up those interest-free big tax refunds and get an opportunity to put your own money to work for you a lot quicker.
The second step feeds off the first step: You need to follow through with your extra income and invest for the long term.
There are a lot of ways of going about doing this, including setting up a stock account with a brokerage firm, participating in a 401(k) or similar retirement plan if offered by your employer, or, most importantly, setting up an individual retirement account that will allow you to take advantage of upfront or back-end tax breaks.
Traditional IRAs and Roth IRAs could offer taxpayers and investors incredible advantages, although you'll have to see (a) if you qualify based on income and (b) which one is right for you. Traditional IRAs allow taxpayers to take an upfront tax deduction based on their annual contribution up to $5,500 in 2013. Eventually, though, you'll pay taxes on your capital gains once you begin taking distributions from your IRA at age 59 1/2. A Roth IRA, on the other hand, has no upfront tax perk whatsoever, but it can really work in favor of younger investors since it does allow your investments to grow completely tax-free as long as you don't take any unauthorized distributions.
So keep in mind as we start the new year and stride into tax season that there are very tangible ways you can improve your financial position ... if you're willing to act on them, that is!
Posted on 3:13 PM | Categories:

Best Selling Tax Prep Software @ Amazon.com

The Daily Camera writes: The top 10 best-selling software programs on Amazon.com, as of Jan. 6. Prices below are the list price, visit Amazon.com to view the actual sales price.


1. TurboTax Deluxe Federal, E-File and State, Intuit Inc., $59.99
2. H&R Block Tax Software 2013 Deluxe + State, H&R Block, $44.99
3. TurboTax Premier Federal, E-File and State 2013 with Refund Bonus Offer, Intuit Inc., $89.99
4. TurboTax Deluxe Federal + E-File + State 2013 with Refund Bonus Offer (download), Intuit Inc., $59.99
5. Amazon Cloud Player for PC (download), free
6. Norton Internet Security 2014 - 1 User/ 3 Licenses (download), Symantec, $79.99
7. TurboTax Home and Business Federal, E-File and State 2013 with Refund Bonus Offer, Intuit, $99.99
8. Quicken Deluxe 2014 (download), Intuit, $74.95
9. Quicken Deluxe 2014, Intuit, $74.95
10. H&R Block Tax Software Deluxe + State 2013 (download), H&R Block, $44.99

Posted on 10:32 AM | Categories:

3 tax benefits of home ownership threatened in 2014

Marion Franke for The Courier writes:  If Congress fails to renew certain tax benefits of home ownership, homeowners could pay for their failure to act. For decades, the government has tried to take away the tax benefits of home ownership. Even the basic mortgage interest deduction has been considered for cutting the budget.
The Realtor community continues to fight for the rights of homeowners and currently the basic right to deduct mortgage interest is still available (Be sure to get the advice of a qualified financial professional to learn your specific deductions). We believe that balancing the budget on the backs of homeowners is bad for our country and economy. After all, homeowners already pay more than 80 percent of the federal income taxes collected.
These three tax benefits have not been renewed:
Tax Credits Home Energy Improvements: Last year, Congress extended the tax credit for energy-efficiency improvement through 2013, but it expired Dec. 31. If you have not already claimed a credit of $500 or more for qualified improvements since 2005, your ability to claim the credit may be over.]]>
To claim the credit, the improvements must meet very specific energy-efficient requirements. The tax breaks are complex, so look at all your receipts and manufacturer’s certifications to determine whether you qualify for a previous year.
Private Mortgage Insurance Deduction: Currently, the mortgage insurance premiums a home-owner pays is treated the same as mortgage interest. This affects more than 4 million taxpayers who use PMI to enable them to purchase a home with less than a 20 percent down payment.]]>
According to H&R Block, taxpayers deducted $5.6 billion in PMI deductions in 2010. This deduction applied to conventional Fannie Mae and Freddie Mac loans plus Federal Housing Administration insured and Veterans Administration guarantee fees. Next year, the FHA has made changes to insurance fees to extend the life of the loan; and the fees are also higher than in previous years.
Mortgage Forgiveness Debt Relief Act: In our area, few homeowners are still threatened with foreclosure. However, those who do face the sad circumstance can get insult added to the injury if the debt forgiveness act is not renewed.]]>
The IRS considers any forgiven debt as ordinary income. So, a family could lose their home, trash their credit and then be hit with a tax bill from the IRS. Since 2007, struggling homeowners have not had to worry about this scenario. For those who are working with the bank to get a loan modification or short sale, their tax liability may have increased thousands of dollars than if the transaction were completed before the end of 2013.

Experts are claiming there is no sign of Congress extending these tax benefits. There simply is not enough “political will” to see them reinstated. There is no formal bill pending to extend them.
Posted on 10:32 AM | Categories:

Real estate and estate taxes / Can a house owned by a decedent be sold before an estate tax is paid?

Karin Price Mueller/The Star-Ledger writes:   Question: Can a house owned by a decedent be sold before an estate tax is paid?

Answer:  Estate issues can be very complicated, so we’re glad you asked the question.
When a New Jersey resident dies, New Jersey statutes provide that state inheritance and estate taxes act as a lien on all property. This includes real property owned by the decedent as of decedent’s date of death, and the liens stay for a period of 15 years unless otherwise paid sooner or secured by a bond, said Lawrence Joel, an estate planning attorney with Joel & Joel in Oradell.

The estate’s executor or administrator must obtain written consent for property transfer, commonly known as a tax waiver, from the Division of Taxation, Joel said.

"The Inheritance and Estate tax waiver establishes that the property is either not subject to tax or that the taxes on the property sought to be transferred have been paid," he said. "Typically, a tax waiver for real property is obtained by filing a complete Inheritance and Estate tax return and paying the taxes due or by filing an L-9 known as the Resident Decedent Affidavit Requesting Real Property Tax Waiver."

He said the L-9 affidavit essentially states that the estate is not subject to New Jersey inheritance or estate tax and can be used in limited situations where lineal descendants — such as children or grandchildren — are inheriting and the estate is valued under $675,000.
When estates are settled, real property is often the largest single asset of the estate, he said, and it’s quite common that the property is marketed soon after the death of the decedent.
Until a sale, the executor or administrator is responsible for safeguarding and upkeep of real property until the estate is settled or the property is sold, Joel said. This includes providing for the payment of the taxes, insurance, maintenance and more.

He said it’s common to need to sell the property in order to pay inheritance and estate taxes and other obligations.

He said it’s smart to get a certified appraisal on the property to establish the fair market value of the property as of date of death. This appraisal value is important for the purposes of tax reporting and setting a sale price for the property, he said. The executor or administrator should maximize the return on the property by selling it for the highest price, hopefully, at or exceeding the property’s appraised value.

"Often real property will go under contract prior the estate obtaining an inheritance and estate tax waiver," he said. "This may be as a result of a delay in filing, backlog on the review of the return by the Division of Taxation or the opportunity of a quick property sale."

If that occurs, Joel said, it is still possible for the estate to sell the property. In all likelihood, the buyer will require an escrow be held to assure that inheritance and estate taxes are paid when the final assessment is made by the Division of Taxation. The escrow may be up to one-and-one-half times the estimated taxes due, Joel said.

If the returns have already been filed and taxes paid, but waivers not yet received, the escrow should be much less if required at all.

"The property may be sold and is subject to the Inheritance and Estate Tax lien," Joel said. "This lien will remain as a cloud on the title to the real property until the lien is satisfied."
Posted on 10:32 AM | Categories:

Tax Shelters for the Unwealthy

Goldman Sachs disclosed in a 2004 filing that 84 of the firm's current and former partners used GRATs. [CEO Lloyd] Blankfein has transferred more than $50 million to family members with little or no gift tax due, according to calculations based on his SEC filings.
See? Maddening. Don't feel entirely left out, though. There are plenty of ways to limit your own tax liability, even if your net worth is measured in five or six figures instead of in millions or billions. Tax shelters are not only for the rich. Following are a few examples.

Consider a Roth IRA
A traditional IRA offers its own kind of tax-advantage, sheltering part of your income from Uncle Sam -- for a while. It reduces your current taxable income and grows in the IRA until you withdraw funds in retirement, at which time you're taxed on them. Better still for many folks is the Roth IRA, which accepts post-tax dollars, but ultimately lets you withdraw your money in retirement tax-free.
That's right. Invest thousands over the years and if they grow into an account worth hundreds of thousands, you'll be able to withdraw all that in retirement without giving Uncle Sam a penny. That's potentially a powerful kind of tax shelter.
Buy a house
Next up, your house. It can be both a physical shelter for you and your loved ones, and also a tax shelter. Those who follow the rules can exclude up to $250,000 in gains from taxation -- up to $500,000 for couples. In other words, if you and your other half buy a home for $150,000 and many years later sell it for $550,000, representing a $400,000 gain, you can bypass paying taxes on that gain. If the corresponding tax rate at the time is even just 15%, you'll be saving $60,000! This handy tax shelter is available to most Americans.
Look at municipal bonds
Bonds may not be exciting, but the tax treatment of municipal bonds certainly is, as most of them will pay you interest on which you don't have to pay taxes. Proceed with caution, of course, since not all municipal bonds are high quality, and bonds are capable of performing poorly, just like stocks. Used sensibly, municipal bonds can act as a tax shelter for small investors (and large ones as well).
Buy and sell securities strategically
You can also create your own kind of tax shelters by timing your holding and selling of securities carefully. It's never smart to only consider taxes when you consider buying or selling a security, but it can be worth taking taxes into account. For example, if you sell a stock after owning it for 11 months and net a profit, that's a short-term capital gain, taxable at your income-tax rate, which might be 25% or more. If you hang on and don't sell until you've held it for more than a year, then it's a long-term gain, taxable at 15% for many of us. Presto -- you'll have parked some of that gain in a tax shelter.
Meanwhile, if you're sure that capital-gains tax rates are going to rise significantly in the near future, you might sell some of your big winners to pay a lower rate on those gains. (You can always buy them back after 31 days pass, in order to avoid the dreaded "wash sale.") Just be sure to assess your big tax picture, because creating a huge capital gain in a single year can sock you with a bigger-than-usual tax bill.
When it comes to your tax bill, you're not powerless. Make smart decisions and you can fork over less to Uncle Sam.
Posted on 10:31 AM | Categories: