Tax Saving for Investors

How to make better use of your investment interest expenses?

Deducting investment interest expenses used to be fairly straightforward but the 1993 tax law changed all that. Prior to 1993, you could include your net capital gains from the sale of investment assets in the calculation of your total net investment income. Net investment income is an important category, since your Schedule A deduction for investment interest expense (interest you pay on debt related to investment assets) is limited to the net investment income you earn for the same tax year. With the capital gains inclusion, you were able to increase other net investment income, like your interest and dividend income, and thereby increase your allowable deduction for investment interest expense. Capital gains helped to increase your investment income, which also increased your allowable investment interest deduction.

The 1993 tax law changed the rules. Now you cannot treat net capital gains as part of your investment income, to increase your investment interest expense deduction, unless you first elect to treat some, or all, of your net capital gains as ordinary income.

Prior to 1997, making the election to treat some, or all, of your net capital gains as ordinary income made sense (under certain circumstances). The Taxpayer Relief Act of 1997 has all but killed this election. Most taxpayers find they will save more income tax in the long run by carrying over the unused investment interest expense to future years rather than elect to treat net capital gains as ordinary income to deduct more investment interest expense in the current year.

You may be eligible to go back to previous tax years and amend your returns for better tax savings. To find out if this will work with you, call us to set up an appointment today.

 
Worthless stock? Write it off as a loss, then end up keeping it!

If you currently have some stock that has become worthless, or even nearly-worthless, you can take a capital loss deduction for the year it becomes totally worthless. But of the stock still has any value at all, even a little, using a tax write-off has to be done very carefully and with a little planning.

There are four basic strategies for writing off nearly worthless stock- two are used for "keeping" the stock and the other two are used for writing off the stock and getting your tax savings sooner. Here are the two strategies for "keeping" the stock:

1. Sell the stock, take a capital gain loss (long or short-term depending on how long you have had the stock), then buy it back after the 30-day wait period required for tax purposes. If the price of the stock increases during that time you will have to pay for the increased value.

2. You can sell the stock to someone who is an unrelated party (possibly a friend) then take a capital loss. You may be interested in having your friend keep the asset because of any possible future increase in the value of the stock; you can buy it back after the 30 days for the same price you sold it for. If the stock has increased in value, and you buy it back for the same price you sold it for, the difference in value will come to you as a gift (as long as the party giving you the gift doesn't exceed their $12,000 yearly limit; it's $24,000 of married and filing a joint return).

If you are interested in how this can work for you, or have questions concerning writing off stocks that you are not interested in buying back, you can call us and we'll be happy to answer your questions.

You can push the limit and actually use capital losses to profit.

You can use proceeds from a "loss sale" to reduce your taxes even further by contributing any portion of the proceeds from the "loss" to a tax-deductible retirement account like an IRA account or an SEP or Keogh account (if you are self-employed).

This idea is to use tax-saving capabilities of the retirement plan to offset additional economic losses. Keeping the funds in your retirement account is the drawback you take by using this strategy. Not to worry, because if you are planning on reinvesting these proceeds anyway, your retirement account will have the added benefit of deferring the income tax on any earnings until you begin making taxable withdrawals from the account.

Keeping accurate mutual fund records can help you save.

If you keep good, accurate records on your mutual funds and follow a few simple steps, you can minimize any current income tax due on the sale of mutual fund shares.

All that you have to do is sell high-basis shares in the fund and identify the sale of these shares in your records. When you are making the sale, specify to the mutual fund which shares will be sold. The mutual fund then confirms the sale of the specific shares (in writing, and in a reasonable amount of time).

By selling the high-basis shares, you are reducing your current taxable gain. You are left holding the lower-basis shares and will pay the income tax on the larger gain when you sell them. But if you have to chose between saving now or later, saving now is always better.

Minimize headaches-and taxes-by limiting mutual fund check transactions. Many mutual funds offer investors the convenience of writing checks out of their account. You should know that this should be used in an emergency only-not on a regular basis.

At first glance, using a mutual fund as a checkbook and keeping the money in the fund you earn a higher rate than an interest-bearing checking account is a good idea. But there are at least three disadvantages to using your mutual fund as a checkbook, and these easily outweigh the advantage of a higher current income. We'll be glad to answer your questions concerning these transactions.