OxfordPress.com

Depressed stocks can cut your bill

By HANK EZELL

Cox News Service

November 27, 2005

Just a few weeks ago, Marcia and Wendell Couch sold shares in some well-known companies, including Boston Scientific, Cousins Properties and Pfizer.

It's not that the Alpharetta, Ga., couple doesn't like the companies. They acted because they like the tax breaks they'll get from the sales. Prices of those stocks are down from what they paid for them, and their losses will offset gains from stocks they sold for profit.

Return to main story Recent Hank columns: Prompt filers will receive tax refunds quicker than ever  A new year calls for a new financial plan  Now's the time to assess spending, saving habits  More "Bank on Hank"

"It may not wipe out everything, but it will certainly come close," Marcia Couch said.

That strategy is one of a number that can help lighten a family's tax bill. What most of them have in common is that they require you to take action before Jan. 1.

•  Balance winners and losers. For stocks held more than one year, a taxpayer can offset capital gains with capital losses. That's what the Couches did.

If you tote up more losses than gains, you can use those extra losses to eliminate taxes on up to $3,000 in regular income. If you have even more losses than that, you can carry them forward to future years and reduce taxes then.

For example, suppose you make a $2,000 profit from the sale of an appreciated stock. At the maximum capital gains rate of 15 percent, you will have a tax bill of $300.

Seeing that problem, you decide to sell shares in a downer — Boston Scientific, for instance — and you lose, let's say, $1,000 on the deal.

When you fill out your tax return, you get to subtract the loss from the gain, leaving you with a net profit of $1,000. At the 15 percent tax rate, you will owe only $150 to Uncle Sam.

•  Wash sales. At one time, tax-haters were perfectly free to sell that Boston Scientific, harvest the loss and buy the stock right back again.

That was too sweet, too sneaky and too costly for the government to countenance. Thus we have the wash-sale rule, which disallows the loss if an investor buys back the same stock or something "substantially identical" within 30 days of the sale.

Remember that the Couches want to own those stocks they sold? "We'll buy them back in 31 days," said Curt Klein of Capital Investment Advisors in Sandy Springs, the Couches' investment adviser.

The risk, of course, is that the stocks might go up during those 31 days, and the investor will miss out on that profit. There are techniques for locating investments that act the same but satisfy the wash-sale rule. But they are not for amateurs.

•  Mutual fund dividends. The law requires a mutual fund to pay nearly all of its investment income and net capital gains to shareholders. Those dividends are usually distributed in December.

If you are planning to buy fund shares in an ordinary investment account — rather than one with tax advantages, like an individual retirement account — it's a good idea to wait until after the distribution. If you buy before, you will have to pay taxes on the dividend. In addition, your shares will be worth less because the dividends reduced the fund's assets.

•  Retirement plans. If you haven't done it yet, try to put the maximum amount into tax-favored plans, including individual retirement accounts, Keoghs and the like.

Maximums have changed. For 2005, you can put as much as $4,000 into IRAs, or $4,500 if you're age 50 or over. Note that there are some limits on the tax deductions you can take for contributions to traditional IRAs. There are no deductions on Roth IRA contributions, though you pay no taxes on earnings until you draw the money out.

You can make 2005 contributions as late as April 17, 2006. The advantage of doing it now is that your investments will start growing tax-free with no further delay.

If you are self-employed and want to start a Keogh plan, you must set it up before the end of the year.

Read more "Bank on Hank" columns