| |
| |
|
Investors: Avoid These 5 Common Tax Mistakes
For many investors, and even some tax professionals, sorting through the complex IRS rules on investment taxes can be a nightmare. Pitfalls abound, and the penalties for even simple mistakes can be severe. As April 15 rolls around, keep the following five common tax mistakes in mind - and help keep a little more money in your own pocket. 1. Failing To Offset Gains Normally, when you sell an investment for a profit, you owe a tax on the gain. One way to lower that tax burden is to also sell some of your losing investments. You can then use those losses to offset your gains. Say you own two stocks. You have a gain of $1,000 on the first stock, and a loss of $1,000 on the second. If you sell your winning stock, you will owe tax on the $1,000 gain. But if you sell both stocks, your $1,000 gain will be offset by your $1,000 loss. That's good news from a tax standpoint, since it means you don't have to pay any taxes on either position. Sounds like a good plan, right? Well, it is, but be aware it can get a bit complicated. Under what is commonly called the "wash sale rule," if you repurchase the losing stock within 30 days of selling it, you can't deduct your loss. In fact, not only are you precluded from repurchasing the same stock, you are precluded from purchasing stock that is "substantially identical" to it - a vague phrase that is a constant source of confusion to investors and tax professionals alike. Finally, the IRS mandates that you must match long-term and short-term gains and losses against each other first. 2. Miscalculating The Basis Of Mutual Funds Calculating gains or losses from the sale of an individual stock is fairly straightforward. Your basis is simply the price you paid for the shares (including commissions), and the gain or loss is the difference between your basis and the net proceeds from the sale. However, it gets much more complicated when dealing with mutual funds. When calculating your basis after selling a mutual fund, it's easy to forget to factor in the dividends and capital gains distributions you reinvested in the fund. The IRS considers these distributions as taxable earnings in the year they are made. As a result, you have already paid taxes on them. By failing to add these distributions to your basis, you will end up reporting a larger gain than you received from the sale, and ultimately paying more in taxes than necessary. There is no easy solution to this problem, other than keeping good records and being diligent in organizing your dividend and distribution information. The extra paperwork may be a headache, but it could mean extra cash in your wallet at tax time. 3. Failing To Use Tax-managed Funds Most investors hold their mutual funds for the long term. That's why they're often surprised when they get hit with a tax bill for short term gains realized by their funds. These gains result from sales of stock held by a fund for less than a year, and are passed on to shareholders to report on their own returns -- even if they never sold their mutual fund shares. Recently, more mutual funds have been focusing on effective tax-management. These funds try to not only buy shares in good companies, but also minimize the tax burden on shareholders by holding those shares for extended periods of time. By investing in funds geared towards "tax-managed" returns, you can increase your net gains and save yourself some tax-related headaches. To be worthwhile, though, a tax-efficient fund must have both ingredients: good investment performance and low taxable distributions to shareholders. 4. Missing Deadlines Keogh plans, traditional IRAs, and Roth IRAs are great ways to stretch your investing dollars and provide for your future retirement. Sadly, millions of investors let these gems slip through their fingers by failing to make contributions before the applicable IRS deadlines. For Keogh plans, the deadline is December 31. For traditional and Roth IRA's, you have until April 15 to make contributions. Mark these dates in your calendar and make those deposits on time. 5. Putting Investments In The Wrong Accounts Most investors have two types of investment accounts: tax-advantaged, such as an IRA or 401(k), and traditional. What many people don't realize is that holding the right type of assets in each account can save them thousands of dollars each year in unnecessary taxes. Generally, investments that produce lots of taxable income or short-term capital gains should be held in tax advantaged accounts, while investments that pay dividends or produce long-term capital gains should be held in traditional accounts. For example, let's say you own 200 shares of Duke Power, and intend to hold the shares for several years. This investment will generate a quarterly stream of dividend payments, which will be taxed at 15% or less, and a long-term capital gain or loss once it is finally sold, which will also be taxed at 15% or less. Consequently, since these shares already have a favorable tax treatment, there is no need to shelter them in a tax-advantaged account. In contrast, most treasury and corporate bond funds produce a steady stream of interest income. Since, this income does not qualify for special tax treatment like dividends, you will have to pay taxes on it at your marginal rate. Unless you are in a very low tax bracket, holding these funds in a tax-advantaged account makes sense because it allows you to defer these tax payments far into the future, or possibly avoid them altogether. David Twibell is President and Chief Investment Officer of Flagship Capital Management, LLC, an investment advisory firm in Colorado Springs, Colorado. Flagship provides portfolio management services to high-net-worth individuals, corporations, and non-profit entities. For more information, please visit www.flagship-capital.com.
MORE RESOURCES:
Google News |
|
|
|
RELATED ARTICLES
The Benefits of Laddering Your CD Investments If you've decided to stock some money away in a certificate of deposit, why not reap the highest benefit over time by laddering your CD investments? What's a CD latter? I'm glad you asked.A CD ladder is made up by purchasing several CD's at one time with different maturity dates. Makin The Sauce Let's face it, you're on a roll. After getting down to your attorney's office to sign the new Living Trust and then diligently tracking down your assets to fund the trust, you should be congratulated. Beta Factors: How They Can Be Used In The Current Situation Ever since the turn of the century, world stock markets have been very volatile. In other words there have been significant movements (up or down) in share prices. College Savings Plans - Are They The Best Choice For My Child? College Savings Plans - are they the best choice for my child?College Savings Plans, also called Section 529 plans, are one of the best ways to save for college because they offer:- Tax advantages- A variety of investment options- Flexible contribution options- Parental control- Little impact on eligibility for need-based financial aidTax advantagesInvestments in 529 plans are usually exempt from federal taxes. Earnings are tax-deferred and are not subject to capital gains taxes. June 2005: Weather Forecasts for Weather Traders If Johannes Kepler, the renowned 17th century astronomer and discoverer of the planetary laws of motion, could speak from the heavenlies, he might have a few words of wisdom to share with the National Weather Service. Although Kepler's name is not normally associated with meteorology, he was quite the weather forecaster in his day. Investing Offshore for Retirement As an expatriate you are in a privileged savings and investing position. Make the most of the options available to you while you can, consider investing offshore for your retirement. Options Education : Opinion versus Fact! The most basic aspect of trading is learning to differentiate between what is FACTUAL and what is OPINION. If you stay interested in the financial markets long enough you will discover that there are a lot of sharks out there who have become expert at making that task very difficult. July 2005: Hurricane Forecasts for Weather Traders Tropical Storm Arlene formed as a tropical depression on June 8, 2005 near 83 West Longitude and 17 North Latitude. Although Dr. Stock Market Retirement Investment Plan For a successful retirement investment plan to work in the stock market, some 'reasonably sure' assumptions would have to be made:The retirement investment plan must take into consideration the one prevailing constant in any stock market security - risk and uncertainty. Understanding that risk and uncertainty are the key factors that propels the return on investment in the stock market far beyond the returns of Passbook Savings Accounts, CD's or Bonds are a start. Lobster Trapping for Investment Ideas Recently, my family and I took a trip to Maine to visit relatives. During our stay, we toured the rocky shore lines and took in the beautiful architecture of the old towns. Finding False Gold in Penny Stock As far as traders go, many do not see the penny stock as a solid way to do business. Many believe that dealing with penny stock is a risky business. Landlording 101, Tricks of The Trade Looking Inside Your Tenant's Mind Basic Mind-Reading Report 101 for LandlordsIt goes without saying but I will say it anyway. The better you understand your tenants and their personal situation, the better you can serve their needs and your own. An Investment Real Estate Strategy Unknown To Most Is A Negative Amortization Loan If you want to make the most of your personal or investment real estate, you should consider a negative amortization loan. Mortgage amortization is basically mortgage balance reduction. Tyranosaurus Rex Everyone knows T Rex was the most fearsome of all dinosaurs. He could and did kill everything in his path for food or maybe stupid meanness. A Safe Port For Mutual Funds But Not You! Soft dollars, a form of legal kickback, is a sly way you can get ripped off by mutual fund managers. Full service brokers give these kickbacks to non-indexed mutual funds in the form of a "rebate" to purchase research, software, and even computer equipment. Coca-Cola - A Value Stock? There has been much talk lately about Coca-Cola and its potential as a value stock - as it now spots a dividend yield of 2.6% (which is the highest dividend yield since the late 1980s) and a P/E or less than 21 - right at the bottom of its five-year low. The Economy Is Not The Stock Market Several days ago, the Commerce Department reported that May's factory orders had increased by a 2.9 percent. Can Using Sales Leaseback Method of Investment Property Acquisition Reduce Risk? Sales Leaseback compared to traditional property investmentCan a Sales Leaseback arrangement make investing in Orlando investment properties more safe and reliable?Yes. Providing a guaranteed rental amount each month is the safest and most reliable way to realize a return on your investment. Mutual Fund Selection Made Simple By Indexing! Non-indexed mutual funds try to keep it secret that actively managed mutual very funds rarely do better stock market indexes. The higher fees of the managed funds really make it hard for these funds to out compete indexed funds. Top Ten Investment Mistakes 1. Lacking an investment plan a/k/a/ "Don't take a trip without packing the map".
|
|
|
|
|
