End-of-Year Tax Strategies for Investors
By Julian Block, attorney and former IRS investigator
Time is running out on your opportunities to save taxes for 2001. Here are some tips to guide you in your search for steps to take by Dec. 31.
CAPITAL GAINS. There is a break for long-term capital gains from sales of stocks and other investments owned more than 12 months. The top rate is 20 percent, versus a top rate of 39.1 percent for "ordinary income," which is IRS jargon for income from sources such as salaries, business profits, dividends, and interest.
CAPITAL LOSSES. You can offset capital losses against capital gains and up to $3,000 of ordinary income. What if total losses exceed $3,000? The law allows you to carry forward any unused net loss over $3,000 into the following year and beyond, should that prove to be necessary.
WASH SALES. Be mindful of a limitation when you sell shares to establish a tax loss and want to maintain a position in the same company. Unless at least 31 days elapse between the sale and the repurchase, you will run afoul of the wash sale rule and forgo your loss for the time being.
An often-misunderstood point: This restriction does not apply to a profit on the sale of shares of stock. You are free to take your profit and immediately reinvest the proceeds.
The wash sale rule comes into play only when you suffer a loss on the sale of shares of stock (including shares of a mutual fund) or securities and then purchase, or buy an option to purchase, "substantially identical" stock or securities. If you do so within 30 calendar days (not trading days when the market is open) before or after the sale date, a total period of 61 days, you will not be able to use that loss to offset other capital gains until you sell the newly acquired investment. The wash sale rule also applies to an option to sell stock or securities.
YEAR-END STOCK GAINS. Sell some shares during the last week of Dec. and you might not receive payment until Wednesday, Jan. 2. This kind of sale often straddles the year-end because the New York Stock Exchange and other securities markets generally require three full trading days from the trading date to the settlement date. The trade date is when you order the sale to be executed and the settlement date is when you receive the sales proceeds and the shares must be turned over.
At one time, the law allowed you to report the gain from a last-week-in-December sale in the year of the trade date or the year of the settlement date, whichever was more advantageous. Now, however, you have no choice. You must report the profit in the year the trade takes place, regardless of when the settlement takes place. To shift the gain from this year, delay the sale until next year.
As for capital losses, the rules are unchanged. Report a loss in the year the trade takes place.
CAUTION. It can be dangerous to your financial health to make decisions to sell some investments and purchase others solely on the basis of tax considerations. You also need to consider the prospects for your present portfolio, your overall financial position and where to stash the proceeds from the assets you unload.
Julian Block is an attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His “Year-Round Tax Savings” shows how to save truly big money on taxes – legally – and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. To order the publication, send $9.95 for a printed copy or $8.95 for an e-mail version to:
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