Welcome to Part 2
We began yesterday with a look at some things you can do in these last couple of weeks of the year to cut your upcoming tax bill.
Today, we examine some investment actions to consider — or, in one case, avoid — by Dec. 31.
As mentioned when we started this series, you’ll see that several of these investment moves also have tax considerations.
Rebalance your portfolio
Any investor knows the importance of balance. Some folks obsess about their assets, checking values daily (or more) and are constantly trying to tweak their holdings. Others buy a stock or fund and don’t pay any attention to it for years. Neither is wise.
Morningstar recommends every investor have an Investment Policy Statement (IPS), a written investment strategy that helps you create and stick with an investment plan. It in essence, says the investment research firm, an IPS serves as both a blueprint and a report card.
If you don’t have an IPS, create one now. Then look at what you have in your portfolio and whether you need to make any changes.
Sell losers to offset winners
Your year-end review of your portfolio will reveal your investment successes and unfortunate holdings. But don’t freak out about those losers. If you did well with some of your choices, now’s the time to sell the dogs and use the losses to offset the taxes on your investments gains.
Don’t forget about any prior year losses that you carried forward. And keep in mind that you also can use these capital losses to offset up to $3,000 in ordinary income.
Pay attention to distributions
Many mutual funds pay out year-end capital gains distributions, which can really mess up your tax planning. Investment experts say don’t buy a fund until after it makes its year-end payout. If you buy just before the distribution date, as noted in this Kiplinger story, you’ll end up with a tax bill on that new investment.
If, however, you want to sell a fund, experts suggest you do so before it makes its annual distribution. This date, known as the ex-dividend date, can be found on the fund’s Web site.
Don’t sell too soon
Some investors, however, might want to wait to make portfolio changes until 2008. Next year, individuals who are in the 15 percent rate bracket can take advantage of a zero-percent rate on long-term capital gains instead of the current 5 percent rate.
The 15 percent bracket in 2008 tops out at $65,100 for joint filers, half that for single taxpayers. Remember, however, that all investment decisions should always be made based on your overall financial situation and not just tax considerations.
Keep an eye on the kiddie tax
Another issue that investors need to note in 2008 is the "kiddie tax." This law, created to keep parents from shifting assets to their children in order to take advantage of the child’s lower rates, next year will apply to more young investors.
In 2007, the kiddie tax applies to children younger than 18 and who have asset earnings of more than $1,700. In 2008, children under 19 and full-time students under 24 also will also be subject to the kiddie tax if their investment income is more than $1,800.
So a young person who will be 18 or older at the end of 2007 should think about recognizing gain on appreciated property in 2007 so his or her lower rates will apply.
