Financially: Yr-end tax planning for mutual fund shareholders and charitable donations. Native information

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 Financially: Year-end tax planning for mutual fund shareholders and charitable donations. Local news

This is the second in a two-part series that looks at year-end financial planning. The first column appeared last week.

Before you identify the areas where you can lower your taxes on your mutual fund holdings, it’s a good idea to briefly review the IRS rules on capital gains and losses in general.

If, when comparing your realized profit (the securities sold or if the company was bought by another company for cash), a profit is made on your realized loss, the net result is a loss of which only up to $ 3,000 is deducted from ordinary income can. The remaining amount can be carried forward indefinitely. An additional component to consider before realizing any capital gain or loss in your portfolio is whether the transaction would trigger a long-term or short-term capital gain / loss.

Long-term transactions are defined as those where the underlying security has been held for a year or more and is nil for those taxpayers who individually file taxable income less than $ 40,000 and those who collectively file taxable income less than $ 80,000 Percent to be taxed. at 15% for those filing individually with taxable income between $ 40,001 and $ 441,150 and for those filing together with taxable income between $ 80,010 and $ 496,600. For those applicants fortunate enough to be above these levels, the federal long-term capital gains tax rate is 20%.

Short-term transactions where the security is held for less than a year are taxed as ordinary income and are subject to the same tax rate as your wages or dividend income. For most taxpayers, the federal government tax rate is twenty-two percent. In either case, long-term and short-term capital gains are taxed as ordinary income for taxpayers in New York State.

Number one, call your mutual fund and ask if they have plans to make year-end distributions. Note that mutual fund declared capital gains are taxable whether you receive them in cash or reinvest in additional stocks. Furthermore, the distribution has no economic benefit. This is equivalent to receiving four quarters of taxable income in return for your non-taxable one-dollar bill.

If you get a call and find out that your mutual fund intends to declare a capital gain, find out how much it will be per share and what date it will be declared. You can use this information to determine what steps, if any, you may need to take to minimize the impact of this declared profit.

Second, swap the mutual fund in which you have a taxable loss for a similar fund. Please note that your adjusted tax base will consist of your initial contribution to the Fund plus any subsequent out-of-pocket expenses and reinvested dividends or capital gains recorded in previous calendar years, less any withdrawals.

Regardless of what others might say otherwise, given that there are over eight thousand mutual funds to choose from, there is always a suitable alternative to your current fund. Do not think that your fund is “the best” or “one of a kind”.

Be sure to ask your tax advisor before making any year-end portfolio transactions.

Good luck if you trim your portfolio for tax savings, you will make dollars and cents!

Charitable purposes

In our opinion, the most obvious and effective way to give something to a nonprofit organization is by giving away valued stocks. This is a win-win for both the taxpayer and the charity. The taxpayer can deduct the market value of the stock on the day of the gift and the charity receives the donation. In addition, by donating the valued stock instead of selling the stock and donating the cash proceeds, the taxpayer avoids any capital gains tax.

Please note that this only works with valued securities on taxable accounts. In general, if you hold a stock that has declined in value, it is a good idea to sell the stock and donate the cash proceeds. This method allows the taxpayer to write off the capital loss up to the current IRS restrictions.

Readers will find that the paragraph above applies not just to valued stocks, but to all valued assets including bonds, mutual funds, and real estate.

The Pension Protection Act of 2006 allows taxpayers over the age of 70 ½ to exclude qualified charitable contributions up to $ 100,000 per year from a traditional or Roth IRA from their gross adjusted income. Before passing this bill, a taxpayer would need to first withdraw the money from their IRA and then make the contribution. Often times, this withdrawal resulted in taxation of the taxpayer’s social security benefits, cuts in property tax benefits, and cuts in other government-sponsored programs.

This law allows the taxpayer to bypass this step, eliminating the previous pitfalls mentioned in the previous sentence. Additional benefits of transferring the IRA distribution directly to a qualified charity are that that donation will qualify for the owner’s minimum payout, but will not count as a percentage of Adjusted Gross Income towards the IRA owner’s maximum contribution limit of 50%.

One last way to get into the charitable donation mood this Christmas season is with life insurance gifts. To make this transfer, the current owner must designate the qualifying nonprofit as either the new owner or the irrevocable beneficiary. If the owner takes either of these measures, they may receive a tax deduction on the present value of the insurance contract or their accumulated premium payments, whichever is greater.

As always, please check with your tax advisor prior to making substantial charitable donations.

Please note that all data are for general informational purposes only and are not intended as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, the bond market or any security contained therein. Securities involve risks and capital fluctuations will occur. Please do thorough research on any investment before tying up any money or consult your financial advisor. Please note that Fagan Associates, Inc or related persons will buy or sell securities it recommends to clients. Check with your financial advisor before making any changes to your portfolio. To contact Fagan Associates, please call (518) 279-1044.