Opinion: Tidy up financial situation at year's end

First, be certain that you have used any available losses on your investments to offset as much as possible the gains you have taken during the year. (No gains? Whoops, maybe you need to rethink your strategy or change financial professionals. Or if you don’t have a strategy, give serious thought to developing one.)

If you have no gains but have unrealized losses on the books, consider taking up to $3,000 of such losses that can then be deducted on your return. If your losses exceed that amount, they can be carried forward for use in future years. If you have net long-term gains after taking your losses, bear in mind that you have a large advantage in terms of the rate – a maximum of 15 percent – at which they are taxed. That rate also applies to the qualified dividends you have received. So, two things to remember: that tax rate is the best in our lifetime, and you only pay taxes when you’re making money. Or as the old saying goes, “Nobody ever went broke taking a profit.”

Do you have a stock that has appreciated substantially and that you are considering selling, while at the same time you wish to make a gift to your church or a not-for-profit organization? Use the stock as your gift. It’s better than selling it and paying the taxes on the profit and then giving cash.

You also can consider gifting appreciated securities to someone (children or grandchildren, for example) in a lower tax bracket. Current law allows you to give $12,000 – $24,000 if you are married and you each make a gift – to as many people as you wish. Again, this method is preferable to selling, paying the tax on the profit, and then giving cash. And it works especially well if that person has losses available to use should he sell the stock.

Caution on capital gains

Here’s something to avoid doing. Don’t buy a mutual fund before year’s end unless you are certain that you are not going to be getting an unwelcome capital gains distribution on the shares.

How could that happen? Think back to the market decline that began in 2000. Many mutual funds faced significant client redemptions, forcing them to sell some holdings at losses. Those losses were carried forward to offset gains taken in subsequent years, which meant little in the way of taxable year-end distributions to shareholders. But many mutual funds have used up their losses and now, because they are required to distribute gains no less often than annually, are making such payouts, creating a tax liability for shareholders. The problem to avoid is one of buying a mutual fund that has a large gain that is about to be distributed. You could wind up paying taxes on the gain while the value of your shares is decreased by the amount of the payout. It’s sort of the worst of two worlds. (However, if you are buying the fund shares in a tax-deferred account, the above is not a concern.)

Asset allocation

Not tax-related, but important, is a check of your asset allocation. Are the percentages you assigned to each asset class in line, or have some of them under- or outperformed to the point that they are considerably higher than your desired percentages?

One important aspect of asset allocation with an annual rebalancing is that it actually forces one to sell high and buy low. For example, if the small-cap allocation exceeds by more than 3 percentage points of the original designated percent that means that another asset class has underperformed. Rebalancing calls for cutting back to the original allocation on the small cap and increasing the holdings in the underperforming asset class or classes.

Merry Christmas

May the faith and warm traditions of these special days remain with you, your family, and friends throughout the year.

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]