Volume
2
| Tax Matters | Home Office Expenses | Estimated Taxes | Additional Volumes |
Those Painful Minus Signs in Your Portfolio
Can
Ease your Tax Burden
Tax-loss
selling essentially involves shedding shares that have lost money since
you bought it. (Even if a
fund is down for the year, you can’t take a tax loss unless the shares
are below the price you originally paid.)
By
selling, you realize a loss that can then be used to offset any capital
gains you have earned in another part of your portfolio. The result: the
capital gains tax burden you anticipated is tempered.
Following is a brief guide to the maze of tax-loss selling:
| 1. | How much capital gains can I offset with tax loss selling? |
| Investors can offset an unlimited amount of mutual funds’ capital gains with tax loss selling of funds. However, if your net losses exceed your net gains, then an excess $3,000 of losses can be used to offset other income. If you have more than $3,000 in leftover net losses, the remainder – known as tax loss carry-forwards – can be used in the next year to offset capital gains. | |
| 2. | Can I buy back the losing fund I just sold, especially if it fits well with my asset allocation? |
| Investors can repurchase the mutual fund they sold to book a tax loss, but only after a 30-day period. If you buy the same fund within 30 days, the tax loss that you booked from the sale is considered a “wash-sale, ”that is, you can’t use it at tax time. | |
| 3. | What mutual funds should I sell if my portfolio holds several losing funds? |
| While there is no rule against selling every losing fund in your portfolio, there are many reasons not to take such a sweeping approach. Selling all your losers at once may throw your asset allocation out of whack. Consider selling funds that have dropped the most. As a general rule of thumb, look to sell funds that have losses of at least $1,000 or have fallen more than 10% of the amount you invested. A loss smaller than that amount will generate little tax advantage. Avoid creating holes in your asset allocation by selling two similar mutual funds at once. | |
| 4. | Where can I find more information on tax loss selling? |
| Seek advice. Investors should always check in with their accountants or other tax planning professionals. You may find that you already have tax loss carry forwards that can still be used to offset gains. |
Effective
in 1999, it is easier for taxpayers to qualify a home office as their
“principal place of business” for purposes of deducting the expenses
of their office. A home office qualifies as the taxpayer’s “principal place
of business” if:
-
the office is used to conduct administrative or management activities of a trade or business
-
there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.
Deductions
will be allowed for a home office meeting the two-part test only if the
office is exclusively used on a regular basis as a place of business by
the taxpayer and, in the case of an employee, only if such exclusive use
is for the convenience of the employer.
In
the year 2000, taxpayers with AGI in excess of $150,000 may need to
increase estimated tax payments to avoid tax penalties.
For 1999, if withholding and estimated tax payments equal at least
105% of the tax shown on the 1998 return, no penalty is imposed.
The
threshold for the safe harbor increase for 2000 so that a high-income
taxpayer must deposit the smaller of 905 of expected tax for 2000, or 106%
(108.6% if President Clinton signs the tax legislation passed by Congress)
of the tax shown on the 1999 return, in order to avoid penalties.
The first estimated tax payment for 2000 is due April 17, 2000.