Year-End Tax Tips for Investors

As we approach the end of 2020, it’s a good time to review your investment portfolio for tax-

saving opportunities. Although you shouldn’t base your investment decisions on taxes alone, it’s

important to weigh the tax implications when buying and selling securities. Here are some tips to

consider:

Have you recognized significant capital gains this year? If so, consider selling some investments

that have declined in value to soften the tax blow. You can use these losses to offset capital gains

and, if you end up with a net loss for the year, you can use it to offset up to $3,000 in wages or

other ordinary income.

If you’ve recognized a net capital loss this year, consider harvesting some capital gains. If you’ve

been thinking about selling investments that have appreciated in value, doing so now allows you

to reduce or eliminate capital gains taxes by offsetting those gains against your losses. If you use

this strategy, it’s a good idea to leave yourself with a $3,000 net loss to reduce your ordinary

income.

Some investors sell securities at a loss to harvest the tax benefits and then buy them back to keep

their portfolios intact. This can be an effective strategy, but there’s some risk involved because of

the “wash sale” rule. That rule prevents you from currently deducting a loss on the sale of a

security if you purchase a substantially identical security within 30 days before or after the sale.

For example, if you sell stock at a loss on December 15, you’ll have to wait at least 31 days

(until January 15) to purchase the same stock in order to deduct the loss this year. If the stock’s

price rises sharply during the waiting period, the additional expense of buying it back will reduce

or even erase the tax benefit.

There are strategies you can use to avoid the wash sale rule. One option is to buy similar, but not

identical, securities immediately after the sale. Another is to “double up” your investment — in

other words, you first buy the same number of shares of the security you wish to sell at a loss,

then you wait 31 days to sell the original shares. When you sell, one of two things happens: 1)

you deduct a loss as planned on the original shares, or 2) if the price goes up the gain on the

additional shares makes up for any lost deductions. Either way, when the dust settles, your

portfolio is unchanged.

If you’re planning to make charitable contributions this year, consider donating appreciated

publicly traded stock rather than cash. You’ll still enjoy the benefit of a charitable income tax

deduction, plus you’ll avoid taxes on the gain you would have recognized had you sold the stock.

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These are just a few examples of year-end strategies investors can use to reduce their tax bills.

For assistance in creating a year-end tax plan that strikes an appropriate balance between tax

savings and smart investment choices, please contact us.