Portfolio planning: 3 year-end tax tips

Sorry to intrude on your good holiday cheer, but the new year is just weeks away, and that means it's time to start positioning your portfolio for tax season.

Fortunately, when it comes to tax planning for your investment accounts, the basics remain essentially unchanged this year. The evergreen rules still apply when it comes to making the most of your annual investment gains and income.

As you rebalance your portfolio for 2012 (and prepare to pay taxes for 2011), here are three key steps to take, writes Rande Spiegelman, vice president of financial planning at Charles Schwab Center for Financial Research, in a recent note to clients:

Harvest losses. No one likes a losing investment. But at tax time, they can be blessings in disguise, as you can use capital losses to offset taxable capital gains, plus up to $3,000 in ordinary income ($1,500 for married couples filing separately). Look in your taxable accounts for investments with relatively large losses where you don't expect a comeback. Remember, any losses you can't use to offset gains this year can be carried over into future tax years. One word of caution: Watch out for the so-called wash sale rule, which prohibits taxpayers from recognizing losses on sales of securities that are repurchased within 30 days.

Make the most of tax-advantaged accounts. You might be able to further bring your asset allocation back in line without incurring taxes by rebalancing in tax-deferred retirement accounts like IRAs or 401(k)s.

Consider cash flow. If you're living off your portfolio in retirement, remember to set aside any cash you might need for the next 12 months as you rebalance. For example, if your portfolio is overweight to stocks, you could take out what you need to live on from that overweight portion and then reinvest the rest in bonds until you're back on target.

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Asset allocation, regular rebalancing and heaps of patience are a long-term investor's best friends, but they can only help so much if your portfolio's performance is hurt by poor tax planning. As Spiegelman says, "These tried-and-true strategies may help you keep more of your hard-earned income and boost your after-tax returns. After all, it's what you keep that counts!"