Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses up to $3,000. 

Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.

Tip: After selling securities investment to generate a capital loss, you can repurchase it after 30 days. (If you buy it back within 30 days, the loss will be disallowed.) Or you can immediately repurchase a similar (but not the same) investment, e.g., another mutual fund with the same objectives as the one you sold.

Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment is restored and you have a higher cost basis for your new investment (i.e., any future gain will be lower).

Note: The maximum long term capital gains tax rate is currently 15%. This is set to rise to 20% in 2011. Many believe this increase could come about sooner with a change in administration in 2009. This potential change in rate in something to think about in your long term investment planning.

Mutual Fund Investors

Before investing in a mutual fund, determine whether there will be a dividend at the end of the year or a dividend that will occur early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.

Example: You invest $20,000 in a mutual fund at the end of 2007. You opt for automatic reinvestment of dividends. In late December of 2007, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.

Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.

The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.

Tip: Wait until after the dividend to buy the shares. (The share net asset value will drop after the dividend is paid.) Alternatively, buy the shares in 2007, but opt to take the dividend in cash instead of having it reinvested.

In spite of these tax consequences, it may be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.

Tip: To find out a fund's ex-dividend date, call the fund directly.

Year-End Giving To Reduce Your Potential Estate Tax

For many, sound estate planning begins with lifetime gifts to family members, gifts which reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, in the holiday season, in ways that qualify for exemption from federal gift tax.

Your gifts to any donee are excludable (exempt) from gift tax up to $12,000 a year per donee.

Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2007, you must make your gift by December 31.

Husband-wife joint gifts to any third person are exempt from gift tax up to $24,000 ($12,000 each). Though what’s given may come from either you or your spouse or from both of you, both of you must consent to such “split gifts”.

Gifts of “future interests”—assets which the donee can only enjoy at some future time (certain gifts in trust, for example)—generally don’t qualify for exemption. But gifts for the benefit of a minor child can be made to qualify.

Tip: Consider adopting a plan of lifetime giving to reduce future estate tax.

Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.

You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings, and built-in gain on sale.

Gift tax returns for 2007 are due the same date, April 15, 2008, as your income tax return. Returns are required for gifts over $12,000 (including husband-wife split gifts totaling more than $12,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $12,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed.”

Tip: Call us if you’re considering making a gift of property whose value isn’t unquestionably less than $12,000.

Income earned on investments you give to children or other family members is generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced 5% dividend rate.

Caution: Investment income of a child under age 18 is taxed at the parent’s top rate, where in excess of $1,700. Further, the tax rules regarding this will change again in 2008. The “Kiddie Tax” age limit will increase in 2008 to affect children’s investment income through age 18 (under 19) and full-time students through age 23.