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Year-End Investment Planning: The Clock Is Ticking

Courtesy of Affiliate Vanessa Duchman, Senior Wealth Planning Manager at Glass Jacobson

Investment planning at the end of 2010 was complicated by uncertainty over whether existing tax rates would be extended. This year, it’s the congressional “supercommittee” charged with tackling the country’s deficit financing problem that’s the source of uncertainty. Even though you may not be sure how the committee’s work might ultimately affect you, here are some factors to keep in mind as you plot your year-end strategy.

Harvest tax losses if appropriate

If you plan to harvest losses to offset capital gains, you may want to think about the cost basis of those shares. To maximize your losses for tax purposes, you would sell shares that have lost the most, which would enable you to offset more gains. Unless you specify which shares of stock are to be sold, your broker will typically treat them as sold based on the FIFO (first in, first out) method, meaning that the first shares bought are considered to be the first shares sold. However, you can designate specific shares as the ones sold or direct the broker to use a different method, such as LIFO (last in, first out) or highest in, first out. You can also use a standing order or instruction to specify that a particular method is to be used.

As of this year, brokers must report to the Internal Revenue Service your cost basis for the sale of any shares of stock bought after January 1, 2011. That will make it even more important to make sure when preparing your tax returns that your cost basis records for such sales are accurate and agree with those of your broker. If you decide to specify stock shares in order to determine your cost basis, you must do so by the settlement date (typically, three days after execution of the trade) in order for your broker’s records for the stock sale to be accurate.

Mutual funds, dividend reinvestment plans, bonds, and other securities eventually also will be subject to the same mandatory cost basis reporting requirement.

Don’t procrastinate on tax break for small business stock

If you plan to invest in a qualifying small business, you may want to do so by December 31. That’s because 100% of any capital gains on the sale of qualified small business stock issued after September 27, 2010, and before January 1, 2012, can be excluded from your taxable income. (The exclusion is scheduled to revert to 50% next year.)

To claim the 100% exclusion, you must have acquired the stock at original issue (with some exceptions for stock acquired as an inheritance or gift). Also, the business must satisfy certain requirements, and you must hold the stock for at least five years. There are limits on the total amount of gain that is eligible for the exclusion. There also may be special considerations if you roll over the gain from the sale of your stock to another qualified small business stock, or if you receive qualified stock as part of your deferred compensation plan. Don’t hesitate to get expert help with your specific situation.

Consider the potential impact of higher interest rates

Interest rates have been at historic lows in recent years, but as the economy continues to heal, that won’t always be the case. The Federal Reserve Board has said that raising interest rates won’t be its first step in reducing the support it has given the monetary system. However, at some point, interest rates are likely to begin moving up again. When that happens–and there’s no way to know for sure when that might be–bond prices will begin to feel the impact. As bond yields begin to rise, bond prices will begin to tumble, since prices move in the opposite direction from bond yields.

Don’t let payroll tax increase derail long-term plans

If you’ve benefitted from the 2% reduction in workers’ Social Security taxes in 2011, congratulations! However, be aware that the provision is scheduled to expire at the end of this year. If you’ve been saving or investing that money, your long-term plans will benefit if you can figure out how to replace that source of funding for your investment efforts.



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