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Factoring Your Stocks into Tax Planning

Posted by Admin Posted on Nov 11 2015

As 2015 draws to a close, it is extremely beneficial for you to begin planning for the tax deadline coming up in April of 2016. With proper planning and preparation, you can often minimize the amount of taxes you owe. One important aspect of your financial portfolio that you should examine at the end of each year is your stocks. Here are some important points to consider regarding your stocks as they pertain to tax planning.

Offsetting Gains and Losses

If you need some extra cash for the coming holidays, and you’re considering selling some of your stocks to get it, it’s important that you plan appropriately and try to balance out any gains by selling some of your stocks at a loss. This will prevent you from having to pay unnecessary taxes from the sale of your stocks.

For example, let’s say you purchased 20 shares of Company X and 20 shares of Company Y for $10 per share. Company X’s stock is now worth $20 per share, so you want to sell 10 of your shares to get some extra cash. This will put $200 in your pocket, with a total gain of $100. You will be taxed on this gain. Company Y’s shares are now only worth $5 per share. If you sell all of your stock in Company Y, you will have a loss of $100. This can balance out your gain on Company X’s stock and help you to avoid paying taxes on your gains.

Now, obviously, the taxes on a $100 gain wouldn’t be very significant. But keep in mind that this is merely a simplified example. If you are gaining any significant amount from the sale of your stocks, you can see an increase in taxes on your return next year. This may make it worth selling a stock that is performing poorly in order to minimize the tax amount. You should speak to a certified CPA or financial advisor to determine if this is the best route to take.

Donating Stocks to Charity

Many people give to charities during the holiday season, and you likely know that you receive a tax write-off for these donations. However, many people are unaware that you can actually gift stocks to charities. What are the benefits of doing this? We’ll explain using another example.

As already stated, you have 20 shares in Company X, which you purchased for $10 per share, and which are now worth $20 a share. You plan on making a $400 donation to your church or a charity before the end of the year. If you were to sell all the stock you have in Company X to donate the cash, you would experience a gain of $200 and would be taxed on that gain. So your $400 donation would really only net you a $200 deduction ($400 deduction for the charitable donation, but having to pay tax on your $200 gain).

On the other hand, you could simply gift the stocks to the church or charity. In essence, this is signing over ownership of your stocks to the church or charity in question. The church or charity then immediately gains $400 in stock as a charitable donation from you, and you get to claim a $400 deduction for the donation, even though you only paid $200 originally for the stock. This is beneficial because it allows you to avoid paying tax on the gain of the stock while still maximizing the benefit you receive.

A Note on Wash Sales

Many people used to sell stocks at a loss near the end of the year, only to turn around and repurchase the same stock. This is called a “wash sale” and it allowed people to report a loss in the sale of the stocks when filing taxes, but still allowed them to maintain ownership of their stocks. While this may sound like an ideal situation to some people, the IRS has caught onto the fact that people were exploiting this loophole.

To combat it, they have put laws in place that prevent you from immediately repurchasing stocks after selling them for a loss. Now, you must wait at least 30 days before you can purchase stock in a company that you have recently sold stocks in if you want to claim the loss on your current tax return.

Proper management of your stocks can be an important part of year-end tax planning. If handled correctly, your stocks can be a means of minimizing the amount of taxes you’ll pay in 2016. However, knowing exactly how to handle the stocks in your portfolio can be complicated when looked at from the perspective of tax planning. We’d be happy to go over your portfolio with you and help you make plans for the coming tax season. Just give us a call or stop by the Jones CPA Group in Orem to set up an appointment.