‘Netting Out’ Your Capital Gains

Don’t let the glitter of the holidays blind you to the fact that this is also the season for “tax loss harvesting,” a tax-saving strategy that may be worth exploring.

Normally, you would examine your portfolio and locate the “dogs” you want to dump because they haven’t worked out as you had hoped. You would then use those losses to offset capital gains from successful investments. This year, you’ll want to judge your holdings very carefully. It is likely to be the rare investor who doesn’t have some unrealized losses (losses on paper only) in 2008, although the underlying investments may be sound. The question to consider is whether you are holding a poor investment or simply one whose value has been driven down with others in its sector, a victim of this weak economy’s volatile marketplace.

Before you engage in any tax loss harvesting, determine whether it is wise to sell your investment, because disposing of it will lock in your loss. You may want to do this only with investments you don’t expect to rebound when the economy rights itself and the markets recover. In order to harvest a loss for the 2008 tax year, you must do so on or before December 31.

Reasons to Harvest

To make your decision, assemble a few facts. Do you have any loss carryforwards?

Net capital losses are credited against taxable income at the rate of $3,000 annually – anything more is carried forward to the next tax year. This is in addition to the provision that realized capital losses are first used to offset realized capital gains dollar-for-dollar.

What are your realized losses and gains to date? What are your unrealized gains or losses? If you’ve taken gains earlier in the year and are holding an unrealized loss in what you now regard as an unsatisfactory investment, you can sell it to offset those gains. Or perhaps those gains are already offset by a carryforward loss from a previous year’s return.

Aside from dumping poorly performing securities, there are many valid reasons for tax loss harvesting, including your desire to change asset allocation or diversification configurations.

Before you make a final decision, consider what year-end capital gains your taxable mutual funds may be sending your way. Fund companies estimate these figures well before the end of the year. If tax loss harvesting is on your agenda this year, let me know and I’ll be happy to get that information for you. Keep in mind that if you plan to sell a fund with gains you know will be offset by a carryforward, you’ll want to do that before any distribution of year-end gains that could upset your calculations.

There are several year-end opportunities to consider. I’ll be happy to discuss them with you if you call.

’Tis the Season for Thoughtful Retirement Saving

We usually think of others during this festive time of year, and the National Retail Federation’s estimate is that, even this year, the “average consumer” will do so to the tune of $832.36 spent on seasonal gifts. Even if your budget is less, you might consider an alternative approach that will put your money to work either for your future or that of someone close to you.

We’re encouraged to expect holiday excitement, but interest in even the most thrilling toys tends to fade and they end up being sold for spare change at a yard sale. Contrast the fading allure of such gifts with the potential growth in value of a contribution to your own retirement account or a family member’s financial account.

Indeed, considering how far the market has fallen in the past year, this may be an excellent time to consider financial gifts to yourself or others. With equity values at low ebb, there may be much more potential for substantial growth than when these investments were at their highs last year.

Look to the Future

Even during the holidays, it’s best to fund your own account first. If you have room left under the ceiling of your traditional or Roth IRA, contribute up to the limit. If you need more time, you have until April 15, 2009, to finish contributing to your 2008 IRA - up to $5,000 ($6,000 if you’re 50 or over).

If you choose to give a financial gift to a child or other relative, try something creative. Start a tax-advantaged 529 college savings plan – you may get a state tax break on your contribution, depending on where you live – or fund a Roth IRA for someone who has earned income but can’t afford to contribute. These gifts don’t come with tinsel and flashing lights, but they may have far more lasting value than those that do.

If you’d like to explore the idea further, please give me a call.

Financial Planning:
Gifts of Shares Could Brighten Future Holiday Seasons

No question, this has not been a good year for financial markets. Yet, times like these can be perfect for stock giving.

Suppose a stock that you own was valued at $20 a share in April. Now it has fallen to $10. In April, you could have given away 600 shares of this stock while keeping to the current gift tax exemption ceiling of $12,000 ($13,000 in 2009), but now you can give away 1,200 shares. Of course, you would give shares you expect to recover their earlier value, and the recipient may have to wait a few years for the stock’s price to appreciate.

This is the kind of opportunity not to be missed if you have ever considered making gifts of stock or mutual fund shares. The recipient gains an excellent wealth-building opportunity while the giver, at low cost, bestows considerably more potential value than would have been the case when the markets peaked a year ago. Gifting is easy to do, and since it is not a sale, no capital gains are due until the recipient decides to sell.

The wild card is the unknown timetable for economic – and potential share price – recovery.