Getting Ready for Taxes

Many investors think about taxes in April every year, at the time the bill comes due. This explains why we see so many ads every March and April about funding retirement accounts for the previous year. If investors didn’t complete tax planning in the old year, funding a retirement account is one of the few options for reducing taxes at the last minute. While funding a retirement account is important as a tax strategy and to provide income in the future, there is more to tax planning and now is the ideal time to look at this year’s taxes.

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  • To be honest, anytime is a good time for tax planning. But planning before the end of the year increases the number of opportunities you have to potentially lower your bill.

    Please remember that at TradingTips, we are investors, not tax experts, and because of that we cannot provide tax, legal or accounting advice. This article is for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Taxes are a very personal problem and you should consult your own tax, legal and accounting advisors before engaging in any transaction to obtain a personal solution based on your circumstances. With that in mind, this article can potentially provide ideas for your conversations with the professionals you work with.

    For the fourth quarter of the year, you can take a few steps to prepare to file your returns and maybe even save some money. Those steps include:

    • Review your accounts to determine how much you might owe in taxes
    • Review any fund holdings you have (mutual funds or ETFs) to consider potential distributions
    • Consider whether or not you will need to make some trades by the end of the year to reduce taxes
    • Make an estimated tax payment or adjust withholdings from your salary if needed to minimize the penalties that will be owed if you underpay
    • Consider a spending strategy if applicable

    Let’s look at each of these in some detail.

    At the end of the year, you will receive statements from your brokers reporting your sell transactions that were completed in taxable accounts. The IRS also gets this information so it needs to be accurate and the responsibility of ensuring its accuracy falls on you. Ideally, you should have a system in place to verify the data reported by your broker. It can be a spreadsheet, a software package designed to track capital gains or a copy of monthly statements or trade confirmations to manually verify the transactions.

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  • Acting now provides an opportunity to reduce potential liabilities. If you believe you will have a gain for the year, consider whether or not you have some losing trades you can sell. Capital gains, the proceeds of winning trades, can be reduced by capital losses, the proceed of losing trades. If you have a stock showing a loss, consider whether or not it should be sold.

    This is a time for unemotional decision making. Some investors might have held a stock for years and it has been a loser. They could sell it to take the loss and offset some gains. They can then buy the stock back in 30 days if they want to. If you sell an investment at a loss and then acquire a substantially identical security during the 30-day period before or 30-day period after the sale, the loss will be disallowed under tax rules. A call option on the stock could be considered a substantially similar investment. It could be possible to buy the security in an IRA or Roth IRA, however.

    You can also identify specific shares to sell. If you acquired a position over time, some shares might show a loss while others show a gain. Often, investors average the prices they paid to determine the cost basis. It’s possible to sell specific shares by informing your broker you’d like to do that.  This strategy could reduce your tax bill in certain instances.

    If you own mutual funds or ETFs, review potential distributions from these funds. Looking over when distributions were paid in the past can be a useful starting part because distributions can be taxable income. You could also contact the customer service department of the fund family to ask about possible distributions for this year. They should be able to tell you when an estimate of the distribution will be available and may even have numbers you can use for planning.

    Distributions are not necessarily associated with investment performance. It is possible a fund can lose money and be forced to make a taxable distribution because of the tax rules funds operate under. Once you know what the distribution is likely to be, consider the tax implications and you may discover it is worth selling to avoid the distribution at times.


    If, after reviewing your transactions and estimating potential distributions you find you are likely to owe taxes, consider paying that amount now. The IRS believes the tax system operates on a “pay as you go” basis and expects you to pay the amount due every quarter. To avoid a penalty, you can:

    1. Pay all taxes due amount by the end of the year through withholding and quarterly estimated payments.
    2. Pay at least 90% of the full year’s tax bill before the end of the year
    3. Pay an amount equal to at least 100% of tax your liability from last year, or 110% of last year’s tax liability if your adjusted gross income exceeds $150,000 or less in some cases
    4. Pay at least 90% of the tax liability based on a quarterly annualization of current year-to-date income. The IRS has worksheets for those wanting to do this.

    The fourth quarter also presents an opportunity for you to “bunch expenses” into a single tax year. Miscellaneous itemized deductions, including many investment-related expenses, are only deductible to the extent that they exceed 2% of adjusted gross income. This category of expenses includes tax preparation fees; expenses associated with tax planning; custodial and administration fees; software and subscriptions that you rely on for managing investments and other expenses you pay for managing investments that produce taxable income.

    It’s possible, in some years, to accelerate miscellaneous itemized deductions so that you exceed the 2% threshold. It can be better to prepay these types of expenses in one year if, because of the 2% floor, you wouldn’t be able to deduct them over two consecutive years. Bunching expenses into this year might allow you to overcome the 2% floor and perhaps deduct some fees every other year rather than never being able to overcome the floor.

    There are other factors in tax planning to consider such as the alternative minimum tax, estate planning, gift planning and college funding. Looking at these items now, before the end of the year, could save you money.

    While taxes are not a pleasant task, they are unavoidable. As William O’Neil explained in How to Make Money in Stocks, “Learn how to make a net profit and, when you do, be happy about it rather than complaining about having to pay taxes because you made a profit. Would you rather hold on until you have a loss so you have no tax to pay? Recognize at the start that Uncle Sam will always be your partner, and he will receive his normal share of your wages and investment gains.”

    More simply put, “make money first, pay taxes later and take steps whenever possible to pay as little in taxes as possible.”

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