How Individual Investors Can Reduce Their Tax Bill by Year's End
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What is the main topic discussed in this episode?
Here's your money briefing for Tuesday, December 1st. I'm J.R. Whalen for The Wall Street Journal. It's been a better year for the stock market despite the pandemic. And with 2021 just a month away, individual investors could be in store for a hefty tax on those gains. But there are some key moves you can make now to keep some of that money in your pocket and not Uncle Sam's.
How urgent is it to make year-end tax moves for 2020 gains?
If your losses are bigger than your gains, you can deduct in most cases up to $3,000 each year against your wages and other ordinary income. That's why a lot of people go through their portfolio around this time of year and dump losers.
That's Wall Street Journal contributor Tom Herman. In a moment, he'll be here with a checklist of ways of reducing your coming tax bill. That's after the break.
2021 is just a month away, and for many individual investors, that means there'll be taxes to pay on the sharp gains they've made during this year's market rally. Wall Street Journal contributor Tom Herman is here with pointers for going through your portfolio and scoring some tax advantages. Tom, thanks for being with us.
My pleasure, J.R.
So, you know, it's just about a month left in the year, but is that still enough time for people to make some adjustments to their investments, you know, to prepare for next year?
Sure. There is still plenty of time to take action to trim your taxes for this year and also to avoid making some classic year-end tax blunders.
What common year-end tax blunders should investors avoid with mutual fund payouts?
Well, let's talk about some of those blunders. Payouts from mutual funds. Those are important for people to keep track of. But why do you think they're so easily overlooked?
This is one of the tax blunders that is very easy to make, even for sophisticated investors. This is also an especially timely issue this year because of the stock market's remarkable volatility so far this year. Here's some background. This is the time of year when many mutual funds typically distribute all or nearly all of their net realized capital gains to their investors. Now, if you get one of these payouts, it may seem at first glance like an unexpected bonanza. But in certain cases, this can pose a tax problem. If you are investing for a taxable account, you need to do some research.
How can you identify and avoid large mutual fund capital distributions?
The basic advice is if you're thinking about jumping into a stock market mutual fund between now and the end of the year, find out if the fund you're considering is planning a large year-end capital distribution. If so, ask how much and when, and look for what's called the record date to qualify for that payout. You should be able to find out most of these details on the website of most major mutual funds. Now, if the fund that you're thinking of investing in right away is about to make a major payout, consider waiting until after the payout to qualify for the distribution. By waiting until afterwards, you would avoid getting hit by what might be a sizable tax on realized capital gains that the fund had chalked up previously.
There is a good website called CapGainsValet.com that has details on this subject as well as a lot of the details on payouts. If you're thinking about making a major investment in a mutual fund that's about to make a big payout, consider investing in that fund for a tax-advantaged account, such as an IRA or a 401 . Those investors typically do not have to worry about taxes on those payouts, so that's a very good option. And another option is consider investing in what's called tax-efficient funds. These are funds that typically focus on limiting capital gains distributions whenever possible by keeping their turnover low and also harvesting losses to offset gains. This is a problem for mutual fund investors.
It's not a problem when you're holding individual stocks. Although again, a lot of investors hold their individual stocks in tax-advantaged accounts like IRAs and 401ks because then again, you don't worry about taxes typically.
Now, Tom, today is Giving Tuesday, and donating to charity is a way that taxpayers can definitely see a tax benefit. But how can people use the market run-up to their advantage and donate stock?
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:05–0:26
2
How urgent is it to make year-end tax moves for 2020 gains?
0:26–1:34
3
What common year-end tax blunders should investors avoid with mutual fund payouts?
1:34–2:17
4
How can you identify and avoid large mutual fund capital distributions?
2:17–4:21
5
When is donating stock more tax-advantageous than donating cash?
4:21–5:44
6
Which stocks should you donate and why does the one-year holding rule matter?
5:44–7:44
7
How does tax-loss harvesting work and how much can it offset?
7:44–8:58
8
How can filing status (marriage penalty or bonus) affect a couple’s tax bill?
8:58–9:36
Speakers
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