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Financial Planning > Tax Planning > Tax Loss Harvesting

Four Tax-Saving Strategies for Advisors

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Year-end tax planning is rarely easy. And this year the task has been greatly complicated by a slew of upcoming tax code changes.

After the Nov. 6 presidential election, the House of Representatives has just 16 working days before adjourning on Dec. 14.

What will the new tax rules look like?

Tax experts foresee two possible outcomes: 1) A temporary extension of current tax rules, or 2) A dogfight between political parties that blocks extensions of current tax-rates, setting the stage for current rules to expire by year-end.

Let’s analyze four tax saving strategies ahead before 2012 ends.

1. Sell Assets, Selectively

The prospect of a top long-term capital gains rate on stocks, bonds, and other securities jumping from 15% this year to 20% next year has investors rightly worried. Additionally, high income earners will face a 3.8% tax on investment income.

Instead of rushing to cash in everything, advisors can help their clients to identify just the winning investments they were planning to sell anyway. Selling carefully selected gainers by year-end will allow investors to lock in today’s low tax rates without disrupting their entire portfolio.

2. Harvest the Losers

Many investors that bought into highly touted social media stocks like Facebook, Groupon, and Zynga are sitting on big losses. Now more than ever is a good time to cut taxes by these dumping losers and repositioning the assets.

If an investor sells a losing stock and re-purchases the same security within 30-days, they won’t be able to deduct the capital loss. But if they sell the loser and re-purchase an ETF in the same industry sector, they can harvest their losses without running afoul of the IRS’ “wash sale” rules. This strategy also helps the investor to avoid missing out on any potential rebound in stock prices by staying invested.

Advisors can also help their clients to offset capital gains with capital losses. If the losses are bigger than the gains, or if there are no gains, up to $3,000 of net losses can generally be deducted. Also, additional losses can be carried over into future years.

3. Beware of Mutual Fund Distributions

Don’t let your clients get soaked by mutual funds with large year-end distributions in their taxable accounts. Before buying new fund shares, check the fund provider’s website to see when the mutual fund is planning to distribute its year-end gains. It’s best to wait until the year-end distributions have occurred before purchasing new shares.

Typically, most funds make distributions in December. This tax tip also applies to ETF investors using active management or strategies like long/short, currency, or derivatives. Traditional equity ETFs are still a smart hedge against nasty tax surprises.   

4. Combine Deductions

Simultaneously bunching up charitable contributions with other deductions might be a smart move for certain investors. For instance, taking charitable donations in the same year as itemized deductions would help to maximize tax savings.

Every taxpayer’s situation is different, but a careful analysis with the client may help to uncover smart opportunities.


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