by  /  Tax Planning

Some may think that this is the time of year for trick-or-treating, setting our clocks back one hour, and raking leaves. However to many, this is our last shot at lowering our 2016 income taxes. Our lives are somewhat easier this year because many of the various extender tax breaks were made permanent or renewed for 2-5 years in late 2015 with the passage of the Protecting Americans from Tax Hikes Act (PATH Act). Without this added suspense, let us consider some tax saving steps involved with investments:

Tax Loss Harvesting

  • If you sold multiple securities during 2016 it is likely that some transactions resulted in gains and others in losses, and that some were short-term (held for one year or less) and others long-term (held for more than one year).
    • First, net your short-term gains against short-term losses,
    • Then, net your long-term gains against your long-term losses,
    • Net short-term gains are taxed as ordinary income, and
    • Net long-term gains are taxed according to your income tax bracket
      • 0 percent up through a 15% tax bracket, then
      • 15 percent up through a 35 percent bracket, then
      • 20 percent in the 39.6% bracket
    • Net short or long-term losses of up to $3,000 can be deducted from ordinary income from whatever source, and above $3,000 can be carried forward indefinitely.
  • If you have a net short-term loss and long-term gain, or vice versa, net the two positions and pay tax or deduct the loss based on whichever is higher. Remember to first net short with short and long with long, then net short against long and handle whatever the net result is accordingly.
  • Harvesting losses proactively also helps dampen the effect of unexpected December mutual fund distributions of dividends and capital gains built up during the year, such payouts are taxable even if you reinvest them in additional shares. Remember that you have a taxable event when you sell mutual fund shares that you can control the timing of, but you cannot control the timing of annual distributions from the funds themselves, which are also taxable events.

Wash Sale Rule

  • If you sell a stock and reacquire “substantially identical securities” within thirty days before or after the loss (total of 61 days), that is a wash sale and the result is
    • The loss is disallowed currently,
    • The loss is added to the basis of the reacquired securities, deferring the loss until they are sold, and
    • The holding period of the sold securities carries over to the reacquired securities.
  • Because the wash sale need not be triggered intentionally, watch out for various managers holding the same security in your various accounts. Any buys or sells on your behalf can trigger the wash sale, even if you find out later on the various manager statements.
  • Wash sale also applies to a loss sale in a taxable account and a repurchase in an IRA.
  • Be careful in repurchasing mutual funds within the thirty day period, because whether the new fund is “substantially identical” to the one sold at a loss is a facts and circumstances test.

Worthless Stock

  • The general rule is that if a stock becomes worthless during the year, it is treated as if you sold it for zero on December 31, resulting in a capital loss.
  • You must be able to prove the stock is totally worthless, which is often not easy because companies exaggerate, so you might be inclined to wait for certainty.
  • But the rule is not optional. If the stock becomes worthless, you must deduct it in the year it first becomes worthless or not at all.
  • If you are too early, the IRS could disallow the loss. If you are too late the IRS can claim it was first worthless in a prior year.
  • On balance, it is probably better to claim the loss earlier, rather than later.
  • Alternatively, sell the stock for a penny to create an identifiable transaction. Practically, however, it can be difficult or expensive to sell any share for a penny through a broker.

Multiple Tax Lots

  • In any of these instances discussed above, if you acquired the stock in multiple purchases, it is important to identify the particular tax lot of the stock you wish to sell.
  • If you follow the rules properly, you can identify the particular tax lot to sell, either with lower or higher basis depending on whether you want a higher gain or loss.
  • The default rules depend on the custodian’s approach in booking the shares, but is generally FIFO (First In First Out).

Not every investment goes up every time period. Focusing on these matters can save you tax dollars. MORE TO COME NEXT SUBMISSION.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.