Your Taxes: Portfolio adjustments for year-end

Whether you have realized gains or losses in your portfolio, some tactical moves now can end up saving you thousands and thousands of dollars.

Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
With just a few weeks left in ’15, it’s time for investors to make some portfolio adjustments that can create tax savings and get their portfolios ready for the upcoming year. So far this year, markets have behaved in a roller-coaster-like fashion. Whether you have realized gains or losses in your portfolio, some tactical moves now can end up saving you thousands and thousands of dollars. Here are some tips to make your portfolio more tax efficient as well as make sure that it still matches your goals and risk-tolerance levels.
Profit from losses
If you have sold positions and now sit with capital gains, review your portfolio to see if you have any positions that are currently at a loss. While many investors would never consider selling a position that is losing money, selling your losers can actually make you money. Never think that all is lost. Some good can actually be derived from losing stock positions. When the position is sold, the investor realizes the loss, which has certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill. In fact, for many investors, tax-loss selling may be the most important way to reduce their tax bill.
If done correctly (be sure to speak to your accountant before making any trades), it can save lot’s of money.
For example, if a person has a gain in Stock A and he decides to sell it, he will be taxed on that gain in full.
But if he has a loss in Stock B that he actualizes by selling, he can use the amount of the loss and offset it against the gain in A, drastically reducing the taxes he owes. This might not recover the entire loss, but it certainly cushions the blow.
Conversely, if you have substantial losses from previous years, you should speak to your accountant at once to see if it pays to sell positions that have gained in value to cushion any future tax bill. By doing this, you can actually reset their cost basis at a much higher level, without incurring any tax liability. You have until the end of the year to implement these strategies, so if you have yet to do so, there is no better time than the present.
Be careful
There is a rule in the US, called the wash-sale rule, where the IRS disallows a loss deduction from the sale of a security if a “substantially identical security” was purchased within 30 days before or after the sale. For example, if you sold 100 shares of Facebook on November 24 at a loss and buy back those 100 shares of Facebook on December 15, the loss deduction would not be allowed .The wash-sale rule is designed to prevent investors from making trades for the sole purpose of avoiding taxes.
Get current
Much has changed in the world over the last year. Investors should take the time to make sure that their portfolios are well positioned for current conditions. One of the most overlooked aspects in long-term investing is the need to rebalance a portfolio. Rebalancing is important for two main reasons. First of all, it keeps your portfolio in tune with your long-term goals. Secondly, it keeps your asset allocation in line with your risk level.
Let’s say that you began the year with an allocation of 60 percent stocks and 40% bonds in a $300,000 portfolio.
A few months ago you pulled out $100,000 to buy an apartment. If you weren’t smart about how you sold assets, you could now have an allocation vastly different than what you intended.
Additionally, stock-market moves over the course of a few years can have a drastic impact on your asset allocation, so sit down and reassess your financial situation. If there are changes, take the time now to reallocate your funds to get back to the type of allocation that makes sense for you.
Speak with your accountant and financial adviser to fine-tune your portfolio before year-end.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.