Inside Tips: 2008 Year-end Planning Issues for Your Clients
By Daniel C. Thomas, CPAThe turmoil in the stock market highlights several year-end planning issues for your clients. Although tax considerations should not be the primary incentive for investment decisions, market events have made this year-end a critical time for investment and tax planning.
Recent market losses and fund redemptions by investors have forced many mutual funds to sell investments to raise cash. Several of those sales may give rise to potential significant capital gain dividend distributions as we approach the end of the current year.
Many investors have unrealized losses in their portfolios as a result of recent declines in global stock markets. Now is the time to review a client’s portfolio to rebalance and harvest those losses to provide a cushion or offset for potential realized capital gains. When performing portfolio reviews and loss harvesting, the following planning ideas should be kept in mind:
• Review your client’s mutual fund holdings for potential capital gain distributions. Funds announce the expected year-end dividend distributions on their websites long before they are actually paid. A list of these sites can be found on the CalCPA Personal Financial Planning website, www.calcpa.org/Content/yoursociety/pfp.aspx.
• Be aware of the wash sale rules. If you’re selling to harvest losses and intend to repurchase the same security or fund, make sure you do not repurchase the same security within the 30-day period before or after selling at a loss.
• Sell the mutual fund before the year-end dividend and capital gain distribution are declared to avoid the income recognized by the distributions. Caution should be exercised in reinvesting into another mutual fund at year-end, as you may be investing into another mutual fund making similar year-end dividend distributions.
• If you will be reinvesting into the same or similar asset class mutual fund, consider waiting until the year-end dividend distributions have been made to reinvest.
• Consider reinvesting into a similar exchange traded fund (ETF) if you don’t want to be out of the market for an extended period of time while observing the wash sale rules or avoiding year-end dividend distributions.
• Sell specific lots of mutual fund or ETF shares in a taxable account to maximize loss harvesting and/or defer gain recognition instead of utilizing the average cost method of reporting gains and losses.
• Remember the favorable tax treatment afforded to qualified dividend distributions when considering year-end holding period issues for securities.
• All transactions should be done while considering the clients asset allocation plan and risk tolerance.
Daniel C. Thomas, CPA/PFS, CFP is with Thomas & Thomas Certified Public Accountants in Newport Beach and a member of the CalCPA Personal Financial Planning Committee. You can reach him at dantcpa@pacbell.net. More personal financial planning resources can be found on the committee’s website, www.calcpa.org/Content/yoursociety/pfp.aspx and also from the PFP Committee page dedicated to the financial crisis.
