The countdown to the New Year has begun but before the ball drops, actually before 4 PM EST on that Monday, review your investments and place your sell orders for tax-driven transactions.  For stocks and other securities, make sure your order is placed in time for it to be executed. This is particularly important for thinly traded stock and bonds. Taking a loss will offset gains and you can take an additional $3,000 of losses (on a joint return; $1,500 on a single return) in excess of capital gains as a deduction on your income tax returns. For the maximum advantage, try to offset short-term gains with short-term losses and long-term gains with long-term losses. 

 

For mutual fund investors, even if you haven’t sold any funds this year, you still many have a taxable capital gain. Mutual funds must pass through their net capital gains or losses, and income, to their holders. Give your fund a call if you haven’t heard from it about its 2007 distributions. And, as a general rule, sell a fund before its announced distribution date and buy a fund after that date. This avoids your having to pay taxes on its distributions.

 

If you’re selling your entire position in a fund or security skip to the next paragraph, but if you’re selling a portion of your holding you need to specify the tax lot(s) you’re selling or the First In, First Out (FIFO) rule will apply.  The potential trap here is if you hold a fund or security which you bought at various times, the cost basis of each transaction could be very different. Make sure you specify the most advantageous tax lot to sell.   Mutual fund investors have a third option which is to use the average cost of their holding. Note: Before you make any tax-based decisions you should consult your tax adviser.

 

It’s not too late to make, or maximize, your 2007 IRA and 401-K contributions. Why make them? Because these are tax-deferred accounts. Even if your income is such that you can’t take a deduction for your IRA contribution, once contributed all income and gains are tax deferred.  Then, the power of tax-free compounding works for you. Using these accounts, investors can convert taxable interest and dividend (especially non-qualified) income into tax free (until they begin withdraws at age 70 ½) income. For investors seeking to diversify their portfolios in a tax efficient manner, retirement accounts are a great place for high yielding taxable investments.

 

So before you settle in to watch football or hide from the in-laws review your investments and minimize your tax liability. When the flowers come up in April, you’ll be glad you did.