If you have investments made for the year 2010, now is the time to look them over, take stock of what has gone well- and not so well- with your investment portfolio, and make changes to your holdings and asset allocations before year’s end. In some cases, making changes today will save you considerably on 2011 income taxes.
1. Consider selling your equity investment winners. If you have any stock market equities, now is the time to add up all your long-term capital gains. Long-term capital gains are defined as the appreciation on equities that are held for over one year. If you are in the lowest two income tax brackets (10% and 15%), you may consider selling these equities before year’s end. The reason is because individuals in these lowest two tax brackets will pay nothing on long-term capital gains if the equities are sold in 2010. Starting in 2011, however, tax laws will change and a 10% capital gains tax will be required. Meanwhile, individuals in higher tax brackets will be required to pay a 20% tax on long-term capital gains, which is an increase from the previously required 15% capital gains tax.
2. Consider selling your equity investment losers. If you have suffered losses on your equity investments, consider selling them before the end of 2010 in order to offset your capital gains or to deduct up to $3,000 of your ordinary income- or both. Keep in mind that investment losses must first be used to offset capital gains before they can be used to deduct ordinary income. Also, the SEC prohibits selling and immediately buying back equity losers simply to save on taxes. This prohibition is also known as the “wash-sale” rule, and it includes a 30-day period of time before and after the equity sale date.
3. Review your retirement account. Take a look at your 401(k) plan or your traditional/Roth IRA. Are you on track with your retirement savings? If not, can you increase your contributions? Also, did you lose a lot of money in your retirement accounts? If yes, how can you diversify or change your investments for the following year so that you attain growth? Also, if you are considering switching from a traditional to a Roth IRA, 2010 is the only year in which you can do the conversion and then take the next two tax years (as opposed to one) to pay off the taxes on the conversion.
4. Review your non-equity investments. Find your CD, money market, and other non-equity investment documents. Calculate the APRs on these investments and consider whether their rates exceed the consumer price index (the actual percent cost increase/decrease for consumers on a representative basket of goods). If they do not exceed the consumer price index, then you are effectively losing money due to inflation, and it is time to invest your funds elsewhere.
5. Account for short-term capital gains. If you did any day trading in 2010, realize that come April 15th, you will need to “pay the piper” for any short-term capital gains. The profits made via day trading are taxed at the individual’s tax rate. Set aside some funds now for paying off those short-term capital gains later on.