Investment Planning

  1. If you have purchased shares in the same company at different times, sell the shares you bought at the highest price first. You will need to tell your broker that you want to sell the highest price shares. If you don't specifically identify the shares to be sold, the default method is to consider the shares that you purchased first as the shares that are sold first.

  2. Analyze the timing of any large capital gain. Many tax credits and deductions are limited once your adjusted gross income (AGI) reaches a high enough level, so you want to look at what your AGI will be if you realize that large capital gain.

  3. If you have capital losses greater than $3,000, you may want to take advantage of the losses and sell an appreciated asset. Capital losses are limited to $3,000 on your 1040, with any loss greater than $3,000 being carried forward to future years. The ideal situation would be to have a $3,000 net loss after all of your losses and gains are combined, since the $3,000 loss offsets ordinary income.

    EXAMPLE: Your investment in Company B went south in 2014 and you end up selling the stock for a $60,000 capital loss. If you don't have any capital gains in 2014 to offset the loss, you can only deduct $3,000 on your tax return and the other $57,000 is carried forward to the next year. At $3,000 per year, it will take you about 20 years to fully use the capital loss, unless you have capital gains to use up the loss.

  4. If you have a stock or investment that becomes worthless, the investment is considered to be sold on the last day of the tax year. Your basis in the investment is deductible as a short-term capital loss on Schedule D. A stock is worthless if the related company has gone out of business or is insolvent.

  5. Donate stock instead of cash to your favorite charity. If you hold publicly traded stock that has gone up in value, you can get a charitable deduction for the full value of the stock and avoid paying any capital gain tax.

    EXAMPLE: You donate 100 shares of Company X that you purchased two years ago for a total of $3,000 but which had a value of $13,000 on the day the donation was made. By donating the stock directly to the charity, you get a deduction of $13,000 and you avoid paying tax on the $10,000 capital gain you would have recognized if you had sold the stock. CAUTION: You must give the stock directly to the charity. Don't sell the stock and give the money to the charity.

    The opposite is true for donating stock that has lost value. Never donate stock that has lost value. Instead, sell the stock and donate the cash to the charity. You will then get the benefit of the capital loss as well as the benefit of the charitable deduction.

  6. Don't throw away your mutual fund's annual statements. If your mutual fund has dividends that are reinvested, the records are needed to calculate your cost basis in the mutual fund shares when you do eventually sell.

  7. If you are a passive investor in a partnership or S corporation, remember to deduct suspended prior-year passive losses in the year that you sell or dispose your partnership or S corporation investment.

    EXAMPLE: Bob Smith is a passive investor in Goldstar LLC. Bob's 2012 K-1 from Goldstar shows a $10,000 loss and the 2013 K-1 shows a $5,000 loss. Bob did not have any passive income in 2012 or 2013 to offset the passive losses so the losses are suspended and carried forward to 2014. Bob sells his investment in Goldstar LLC in 2014. The $10,000 and $5,000 losses from 2012 and 2013 will be deducted in 2014 since his investment is disposed of.

  8. Investing in an index fund instead of a mutual fund can save you taxes since index funds do not buy and sell their stock holdings as often as mutual funds. The result will usually be a lower amount of capital gains to report on your tax return. Index funds also usually have lower fees than mutual funds.

  9. Make sure that your tax return numbers match the 1099s you receive from your broker, employer, or investment company.

    EXAMPLE: If you receive a Form 1099R showing a pension distribution of $12,410, then the $12,410 needs to be included on Form 1040 Line 16a as part of total pensions and annuities.

  10. Analyze the timing of any income that you have control over such as pension distributions or stock sales. Many tax credits and deductions are limited once your adjusted gross income (AGI) reaches a high enough level, so you want to look at what your AGI will be if you receive the pension distribution or capital gain. For example, if you have a child in college and you are eligible to take an American Opportunity tax credit for that child's college tuition, then you would want to look at the effect of including any extra income on the American Opportunity tax credit. If your income exceeds the American Opportunity income threshold then you wouldn't receive the American Opportunity Credit.

  11. Qualified dividends are taxed at a lower rate than normal income. They are taxed at the lower capital gain rates. The amount of your qualified dividends will be shown on your Form 1099-DIV in Box 1b. Qualified dividends are not separate taxable income, they are just a classification of regular dividends. For example, if your Form 1099-DIV Box 1a shows $1,000 of ordinary dividends and Form 1099-DIV Box 1b shows $400 of qualified dividends, you only show $1,000 of taxable dividend income on your tax return. You don't combine the two and show $1,400 of income. When you have qualified dividends, you don't use the tax tables to calculate your income tax. Instead you use the Qualified Dividends and Capital Gain Tax Worksheet from the Form 1040 instructions, or if you are filing a Schedule D, you use the Schedule D to calculate your income tax.

  12. If you buy a bond in between the interest dates, the accrued interest from before you buy the bond will be included in your 1099-INT as taxable income. You can deduct the accrued interest from the 1099-INT amount on your tax return. If you have over $1,500 in interest income and need to file Schedule B, you would have one line that reports the full amount of the 1099-INT then the next line you would write down Accrued Interest and enter the amount of accrued interest as a negative to reduce the taxable amount of interest income. For example, you buy a company's bond that pays out interest once a year on January 1st. If you buy the bond in the middle of the year on July 1st and the company pays you $1,000 in interest on January 1st, you will receive a 1099-INT from the company for a full $1,000. Since you only owned the bond for half the time period the interest was accruing, only $500 of the bond interest would be taxable income on your tax return.

  13. If you are a day trader you can get the tax benefits of doing a mark-to-market election which allows you to disregard the wash sale rules and allows you to deduct more than $3,000 in capital losses a year on your tax return. The criteria for who qualifies as a day trader and how to do the mark-to-market election are complicated and you should research it to determine your eligibility and how to do it. On a personal note, I've prepared tax returns for about a dozen day traders in the past and I've never seen one that is profitable. I've seen two clients lose over a million dollars each in a single year through day trading in a year that the market went up. I'm sure there are profitable day traders, but I've never seen one.

  14. When you receive stock in a stock split, there's nothing you need to report on your tax return if you don't sell any of the stock. You divide up your cost basis of the old stock to the new stock received in the stock split. The date acquired for the new stock is the same as the old stock.

    For example, if before the split you have 100 shares of ABC Company that you purchased on May 10, 2014 with a cost basis of $5,000 then each share had a cost basis of $50. If ABC Company does a 2 for 1 stock split and you end up with 200 shares of ABC Company, then your overall cost basis is still $5,000 and each share of ABC Company has a cost basis of $25. The date acquired for all 200 shares remains May 10, 2014. If you sell 10 shares of ABC Company stock that same year, then your cost basis in the 10 shares sold that you report on your Schedule D is $250 and the purchase date of the stock is May 10, 2014.

  15. Don't make death bed gifts. If you have appreciated assets such as rental properties, your home, or stocks, for tax purposes it is better to leave your appreciated assets as an inheritance to your kids or grandkids rather than gifting them. The cost basis of inherited assets is the fair market value of the property on the date of death. The cost basis of gifted assets is usually the same cost basis that the giver has.

    For example, if you have 300 shares of ABC stock that you purchased for $5,000 twenty years ago and that are now worth $40,000. If you gift the ABC stock to a grandchild, then your grandchild's cost basis in the stock will be $5,000. If your grandchild receives the ABC stock as an inheritance and the ABC stock has a value of $40,000 on the date of death, then your grandchild's cost basis in the stock will be $40,000.

  16. When you inherit property, stocks, or a home, the inherited property usually has a basis equal to the fair market value of the property on the date the individual passed away (not the deceased's basis in the property). There is an optional valuation that can be elected by the trustee of the estate, but if the optional valuation wasn't elected by the trustee, then you use the fair market value on the date of death. When you sell the inherited property it is treated as a long-term gain or loss even if you sell the property in less than one year after receiving it.

    EXAMPLE: Your grandfather owned a piece of real estate that on the date of his death was worth $100,000. His basis in the property was only $30,000, however, your basis in the inherited property will be $100,000.

  17. Don't gift stocks that have lost value. If you have a stock that has lost value since you purchased it, don't gift it to your kids or grandkids. Instead, sell the stock so you can take the loss on your tax return and gift the cash to whoever you want to make the gift to. If you give a gift of stock or other property that has lost value, the person who receives the gift can't deduct the losses on their tax return when they sell the stock. The loss just disappears forever.

    For example, if you have 100 shares of XYZ stock that you purchase for $8,000 five years ago and it is only worth $5,000 now, then if you gift the stock to a grandchild and your grandchild turns around and sells the stock for $5,000, nobody gets a tax deduction. You can't take a $3,000 loss on your tax return and your grandchild can't take the loss on their tax return either.


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