NEW YORK - In the few days left between now and year-end, when you’re buying last-minute holiday gifts and making New Year’s plans, you’ll want to review your investment portfolio and figure out what to sell.
Consider it a way to get an extra little gift for yourself going into 2015.
It has been such a great year overall for the stock market - the Standard & Poor’s 500 stock index is up more than 11 percent for the year through December 19 - you might not think there’s any point in looking for losers to sell for tax purposes.
But not every stock or fund is up this year, and it’s likely you’ve got at least one clunker in your portfolio. Maybe you bought shares of Exxon Mobil Corp last summer at $104, and watched them fall 13 percent to a recent $91 as oil prices tanked. Or maybe you purchased Pimco Total Return Fund a few years ago, when manager Bill Gross was considered the bond king, and didn’t sell as the fund’s performance faltered.
While investors don’t like to take losses, studies show that selling losing investments to off-set gains for tax purposes - called tax-loss harvesting - adds to returns, particularly when done throughout the year. While so much of investing is subject to the whims of the market, this is a little piece that’s in your control.
At tax time, you’ll match the losses against the gains. Then, if the result after that matching is a net loss, you can take an additional $3,000 to offset your ordinary income – and carry forward any remaining loss to future tax years.
“Sometimes people don’t want to face the reality that they have a big loss, but you’re not doing yourself a favor by overlooking it,” says Joseph Perry, partner in charge of tax services at Marcum.
This year, such tax-loss harvesting may be especially important. After all, given the market’s rise, you probably do have gains. And even if you have not sold any winning investments, if you’ve invested in mutual funds, you’ve got capital gains distributions so you’ll owe capital-gains tax. Given the market’s rise this year that may be higher than you’d expected.
Consider: Some mutual funds this year have announced distributions of more than 10 percent of assets, including T. Rowe Price Global Technology and Vanguard Mid-Cap Growth. If you have $10,000 in a fund that distributes 10 percent of assets, that’s a gain of $1,000. At the 15 percent long-term capital gains rate, you’d owe $150 in tax - unless you offset it with an equivalent $1,000 loss.
“If you are looking at your portfolio without [considering]the mutual fund distributions you might be missing something,” says Perry. “I’m not sure people are focused on that, and it appears that this year there are more distributions than in the past.”
An additional tip: If you’re selling for a loss, pay attention to the so-called wash-sale rule, the tricky Internal Revenue Service regulation that prohibits you from taking an investment loss if you buy new shares 30 days before the sale or 30 days after it.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Follow us @ReutersMoney or here Editing by Beth Pinsker and Andrew Hay