Tax season is still a few months away, but there are steps investors can take before the new year to help lessen their tax impact, according to experts at GainsKeeper and Capital Changes, both part of Wolters Kluwer Financial Services.
While the financial markets did begin to rebound this year, investors have faced struggles in the financial services sector and disappointing company earnings and profits. But tax-smart trading decisions can provide some relief, say Stevie Conlon, tax director for GainsKeeper, and John Kareken, senior analyst for Capital Changes. They say investors might want to consider the following:
- Don’t Miss Worthless Stock Tax Deductions
You may be able to recognize a loss for securities that became worthless this year. However, you have to act quickly because you can only claim the loss in the same year the stock actually became worthless.“With dozens of failures in the financial sector this year, more investors may find they own worthless stock,” said Conlon. “Investors should consult with their broker or tax professional to determine if a particular security qualifies as ‘worthless’ under tax law and if a loss can be recognized. In order to avoid proving whether the stock is worthless, simply sell the stock to your broker to lock in the loss.”
- Sell Gains to Offset Losses
Investors might also consider identifying and selling gains that could match up with previously incurred losses. Investors who sold stock at losses early in 2009 may now hold stocks that have built-in gains due to the market’s rebound later in the year.“If you already have capital losses this year and have tracked them, consider offsetting these losses by selling some of your built-in gain stocks to minimize your taxes,” said Conlon.
But if you are going to sell stock with gains at the end of the year to offset losses, you need to know your cost basis, or the original value of the security, adjusted for corporate actions, such as splits, mergers and dividends.
“Cost basis affects the amount of gain you have on the sale of your stock, including mutual fund and REIT shares, so you need to know your basis first,” said Kareken. “Investors should pay close attention to various basis adjustments triggered by corporate actions, including return of capital distributions, since they reduce your basis. Many companies have announced that their 2009 distributions will likely be return of capital.”
- Get Your Cost Basis House in Order
While cost basis calculations are necessary to determine capital gains, getting your house in order now is also good preparation for the potential impact of the new cost basis reporting law on individual taxpayers. The law, which will require financial institutions to report adjusted cost basis information for covered securities to the IRS and to taxpayers, takes effect in 2011. The IRS will be looking closely at cost basis information provided by brokers, but the law will also likely increase the level of scrutiny on cost basis calculations made by investors on their individual tax returns.“With so much focus on accurate cost basis reporting, a natural inquiry from the IRS will be to look at investors’ records that establish basis in old holdings,” said Conlon. “Making a point to organize now when it comes to cost basis issues could help save you time down the road.”
Investors should take advantage of the last month of the year to organize their financial records and consult with their tax or financial advisor to discuss optimal tax strategies. Kareken also suggests that shareholders pay close attention to their 1099-DIV forms as they start arriving in January 2010 for dividend payments characterized as a return of capital.
