Make Your Portfolios More Tax Efficient

We are in the midst of tax season so this is a good time to review your portfolio to make sure it is arranged in the most tax-advantaged way.

Most investments (bonds, bond mutual funds and ETF's) that generate interest work best in a tax-deferred account.

Muni bonds are an exception as their interest is exempt from federal taxes and in many cases, exempt from state taxes as well. Hold municipal bonds in your taxable accounts.

Stocks, usually long term investments, should be held in your taxable account for several reasons:

1. long-term capital gains on stocks are taxed at a maximum 20%. Most folks will pay less, 15%. That is certainly a better rate than 25% - 30% regular income as it would be taxed from an IRA or 401K distribution.

2. losses in your taxable account can be used to balance any gains you realize. Losses cannot be taken in a tax-deferred account.

3. qualified dividends from stocks are taxed at 20%. These same dividends in a tax-deferred account are added into the overall distributions and are taxed as ordinary income - 20% -37%.

4. you may donate stock that has grown significantly to charity avoiding any capital gains tax.

5. you may pass appreciated stock on to your heirs at your death. This will give them a step-up in basis (which means the cost basis of the stock - what you paid for it - will now be the value of the stock on the day you died.) If they sell the stock immediately there will be little or no capital gains tax.

Roth IRA's are different!!
All contributions to Roth IRA's are after tax.
Distributions from a Roth are tax-free, so holding both stocks and bonds in a Roth is fine. The one problem is that you may not take a loss on any stock that may have fallen in value.

Be $ Smart - be aware of how dividends, interest and capital gains are taxed so you may position your portfolios in the most tax-efficient way. You keep more money in your pocket and less in Uncle Sam's.

It's Harvest Time - for Tax Losses

2015 has been a volatile year for the stock market. With big dips in the spring and fall you have ridden the roller coaster of investing.

One area taking a huge hit this year was oil and gas. The energy sector was down more than 40% over 2014. Perhaps you have a few energy stocks that show losses - the current value is less than what you paid for them. Or maybe, a "hot tip" from a friend did not pan out well.

This would be the time to review your portfolio and sell any losers. You may write these losses off against any capital gains you've made during 2015, dollar for dollar.

For example - you bought an oil company stock three years back and now it's worth half that amount giving you a $5,000 loss.
Earlier this year you had a winner; you sold a bank stock that doubled going from $5,000 to $10,000 giving you a $5000 capital gain. If you sell the losing oil stock and capture the $5,000 loss you may offset the $5,000 capital gain with the $5,000 capital loss and owe no taxes on the capital gain.

Tax-loss harvesting is a strategy that enables investors to save on their tax return by selling losing securities and using the capital loss to offset their gains. You may take advantage of this strategy in your year-end tax planning.

BUT if you want to buy another oil company stock to replace the one you sold, you should not buy a stock that is "substantially identical” to the one you have sold. The IRS considers this a "wash sale" and will disallow the tax loss. You must replace that oil company stock with an energy company that is substantially different.

Say you realized no capital gains this year, then you may take $3000 of the capital loss against $3,000 of ordinary income. The remaining $2,000 may be carried forward and used against 2016 taxes.

Please call your tax adviser to determine if this strategy is right for you!

Be $ Smart - review your portfolio; sell losing stocks and reduce your taxable income.