This is the time of year when many of us count our blessings, and if you own stocks and mutual funds, you probably have a lot of blessings to count. But eventually, most of us must share some of our good fortune with the
Watch out for mutual fund capital-gains distributions. Mutual funds are required to distribute all gains from the sale of their investments, along with the dividends and interest they earn each year. Unless you own the funds in a tax-advantaged account, such as an IRA or 401(k) plan, you'll have to pay taxes on those gains with your 2014 tax return, even if you reinvest the money in new shares rather than taking it in cash.
Capital-gains distributions from mutual funds were up last year and are likely to go up even more this year, says
Be careful, too, that you don't inadvertently buy a big tax bill. If you plan to purchase a mutual fund for a taxable account between now and the end of the year, wait until after the fund has distributed capital gains. Otherwise, you'll wind up paying tax on what is effectively a refund of part of your purchase price (the fund's share price will drop to reflect the distribution). The distribution date should be posted on the fund's Web site.
Dodge the surtax. For the second year, investors with adjusted gross income (AGI) of
If you haven't fully funded your tax-advantaged retirement accounts, there's still time to funnel money into them. This strategy will reduce your taxable income and your AGI, which could allow you to mitigate or even avoid the surtax. In 2014, employees younger than age 50 can contribute up to
Take advantage of the 0% capital-gains rate. If you're in the 10% or 15% tax bracket, you qualify for the 0% capital-gains rate on long-term capital gains. For 2014, that means married couples with AGI of
The wash-sale rule doesn't apply to investments with gains, so if you're still enthusiastic about the stock or fund, you can repurchase it immediately. This strategy also has the advantage of raising the investment's cost basis (the price you pay for the shares), which will reduce future gains.
As attractive as this strategy appears, it requires finesse. When you sell stocks or funds, your gains lift your taxable income. Sell too much and you could push yourself out of the 15% tax bracket, which means you'll end up paying taxes on some of your profits. To avoid taxes entirely, you'll need to calculate the amount of gains you can reap before your income exceeds the threshold.
In addition, if you're receiving
Give it away. Appreciated securities make great gifts, especially if your adult children or parents are in the 10% or 15% tax bracket (and you're not). When they sell their securities, gains that would have been taxed at up to 23.8% on your return will be tax-free on theirs. The holding period for the long-term capital-gains rate includes the time you owned the securities, so your recipients don't have to wait a year to sell.
In 2014, you can give cash, securities or other property valued at up to
Give securities to charity. Sure, the ALS Ice Bucket Challenge was fun. But before you fall for the next stunt for charity, consider donating appreciated securities instead of writing a check. Most taxpayers get a bigger tax break that way, Steffen says.
Here's why: When you donate appreciated securities you have owned more than one year to charity, you can deduct the value of the securities, based on their worth when you make the gift. You won't have to pay taxes on capital gains, and the charity won't have to pay them, either. Plus, you'll stay warm and dry.
Not all charities can accept donations of appreciated securities. If your favorite cause falls into that category, consider opening a donor-advised fund. The fund administrator will sell the securities for you and add the proceeds to your account. You can deduct the value of the securities on your 2014 tax return and decide later where you want to donate the money.
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Sandra Block is a senior associate editor for Kiplinger's Personal Finance. .