End-of-Year Tax Strategies for Investors

Ferrone & Associates CPAsBlog

Busy season for accountants also, unfortunately, coincides with end-of-year tax planning. As you’re working on this with your clients, here are a few investment strategies from that may delight and help your clients save money next year.  

It’s none too soon to review investment strategies that will keep money in your pocket and out of the IRS’s till, which is, after all, what tax planning is all about. What follows are some reminders on opportunities to save on taxes for this year and even gain a head start on next year.

Year-end stock gains. Sell some shares during the last week of December and you’ll probably not receive payment until early in 2021. This kind of sale often straddles the year-end because the New York Stock Exchange and other securities markets generally require five full trading days from the trading date to the settlement date.

At one time, the law allowed you to choose to report the gain from a last-week-in-December sale in the year of the trade date or the year of the settlement date. Now, however, you’ve no choice. You must report the profit in the year the trade takes place, regardless of when the settlement takes place. To shift the gain from this year, delay the sale until next year. As for capital losses, the rules are unchanged. Report a loss in the year the trade occurs.

Re-evaluate your investments from a tax standpoint. Do you fall into a lofty combined federal, state and, perhaps, city tax bracket because you live or work in a high-tax place? If so, it might make sense to switch from fully taxable investments, such as certificates of deposit, to municipal bond funds or other tax-exempt investments.

Capital losses. The IRS imposes tight restrictions on deductions for those kinds of losses. It allows you to offset capital losses against capital gains and up to $3,000 of ordinary income.  The law allows you to carry forward any unused net loss over $3,000 into the following year and beyond, should that be necessary.

Wash sales. Be mindful of a limitation when you sell shares to establish a tax loss and want to maintain a position in the same company. At least 31 days must elapse between the sale and the repurchase. If they don’t you’ll run afoul of the wash sale rule and forgo your loss for the time being.

An often-misunderstood point: This restriction doesn’t apply to a profit on the sale of shares of stock. You’re free to take your profit and immediately reinvest.

The wash sale rule comes into play only when you suffer a loss on the sale of shares of stock (including shares of a mutual fund) or securities and then purchase, or buy an option to purchase, “substantially identical” stock or securities. If you do so within 30 calendar days (not trading days when the market is open) before or after the sale date, a total period of 61 days, you’ll not be able to use that loss to offset other capital gains until you sell the newly acquired investment. The wash sale rule also applies to an option to sell stock or securities.

For more information please visit: https://www.accountingweb.com/tax/individuals/end-of-year-tax-strategies-for-investors