You can still do crucial year-end tax planning
Just a few weeks are left in 2017, but it's not too late to think about financial moves that can help trim your tax bill before year-end. This year, that means also taking into consideration how the GOP tax plan might also affect year-end financial planning.
For people owning stocks and mutual funds in retirement or taxable accounts, 2017 has been a good year. The major US and foreign stock indexes have notched gains of nearly 20 percent so far. If you have investment gains in your retirement accounts, don't worry about how the profits might affect your taxable income in 2017. That's because retirement accounts shelter gains from taxation, so they don't flow through to your return.
But if you own stocks and mutual funds in taxable accounts, you have good reason to think about the impact of investment gains on your income taxes.
The first thing to do is to review the transaction history for your taxable accounts, noting the gains realized from the sale of any securities during the year. For example, if you sold shares of a fund in which you originally invested $10,000, and the proceeds were $15,000, you would have realized $5,000 in capital gains. On the other hand, if the proceeds were only $5,000, you would have realized a $5,000 capital loss.
Most brokerages make these reports available online, which lets you quickly determine your capital gains or losses for each taxable account. When you do this, make a note of the net amount of long-term positions (held more than one year) and short-term capital gains or losses because each is taxed differently.
Getting such a report is just part of the tax picture. Due to this year's strong stock market performance, many widely held mutual funds expect to make sizable taxable distributions of the gains they earned during the year. One survey of some large funds found they'll be making distributions in the range of 3 percent to 5 percent of share values. Even of the largest index funds, which have lower turnover, expect to make capital gains distributions of nearly 2 percent.
Many funds expect to begin making distributions Dec. 15-27. If you have significant investments in funds in a taxable account, brace for these hefty capital gains distributions this year.
Once you have the capital gains info for you 2017 tax return, here are a few investment planning moves to consider before year-end:
Review your portfolio for any positions that have unrealized losses. If you already realized capital gains or are expecting sizable distributions, consider selling some shares of positions that are currently worth less then you originally paid.
If you've owned well-managed, high-quality stock funds for more than a year, it's likely that you won't find many positions in your portfolio that have unrealized losses. But if you also own some bond funds, you might have some losses because rising interest rates have begun to hit some bond fund share values.
Also, if you typically make charitable donations, consider making them in the form of shares from a stock fund with the largest unrealized gains. Make sure the shares donated were bought over a year ago and that you donate them before the record date for capital gains distributions, which means you'll have to act fast now. But when you do this, you'll be able to claim a charitable donation of the market value of the donated shares, and you'll never realize the capital gains and gains distribution on the shares.
Finally, another thing to consider is how one particular provision being debated in the GOP tax plan could affect individual investors in 2018. This proposal says that when individual investors sell shares, they're required to first sell the shares they've held the longest. This is also known as first-in, first-out, or FIFO.
It means an investor selling some of the shares might have to first sell shares with the lowest cost -- and highest gains. If this provision becomes law, investors who are planning to sell stocks with significant gains might want to do so now, before year-end, because they'll still be allowed to select the shares with the highest cost and lowest unrealized gains to sell now.
