Minimizing Capital Gains Taxes
Six tips show you how.
March 21, 2011
March is one of my favorite months of the year. Winter’s just about over, NCAA March Madness is around the corner, the NBA the playoffs are coming up, flowers are getting ready to bloom and topping the list is the fact that most of us get to spend time preparing to pay taxes.
How great is that?
Although I’m certain the government is going to put our tax payments to good use, I prefer to minimize the amount I pay and that’s why I pay attention to how I might lower them, especially on things such as capital gains.
Capital gains are certainly nothing new to CPAs but to many clients, capital-gains distributions remain one of the great mysteries of accounting. For this reason I thought a quick column on what they are and how to potentially reduce them could be of some help.
Capital Gains 101
As an investor, sometimes your clients sell shares of an investment, such as a stock or a mutual fund. When your clients make money on that sale, they realize a capital gain.
But that’s not the only type of capital gain that exists. Each year, a mutual fund must distribute to its shareholders a portion of any net capital gains it earned when it sold securities in its portfolio. (Net capital gains are what remain after capital losses are subtracted from capital gains.) As a shareholder, you must pay taxes on those gains. So, even if your clients didn’t actually sell any of their fund shares, they could end up paying capital-gains taxes.
As unfair as it sounds, this is what I often refer to as the Mutual Fund Twilight Zone Paradox: sometimes funds pay out capital gains distributions in years that they’ve actually lost money. In 2002, for example, the performance of many funds was down. But at the same time, to meet redemption requests, many fund managers were forced to sell profitable growth stocks they’d held during the run-up of the 1990s. As a result, many shareholders were stuck with funds that lost money, yet still owed taxes on capital-gains distributions from the funds.
In addition and unbeknownst to some, “tax free” municipal-bond funds may realize capital-gains tax from selling bonds at a profit, even though the funds are managed for tax-exempt income.
Minimizing Capital Gains — and Taxes
If your clients are unhappy with the amount of taxes they pay, you may want to encourage them to start planning now to ensure that next year they maximize the money that goes into their own pockets and minimize the money that goes into Uncle Sam’s.
Here are some tips that could help:
As you can likely tell by now, minimizing capital-gains taxes is not the easiest endeavor but hopefully some of the thoughts above can be of help as you advise your clients this busy season.
Alan Haft is an investment advisor representative with an insurance license, author of three books including the national bestseller, You Can Never Be Too Rich, and makes frequent appearances in national print, television and radio media such as The Wall Street Journal, Money Magazine, CNBC, BusinessWeek and many others. The amounts represented in this article should all be considered hypothetical and for example only.
For full disclosure, Haft is a part of a firm that utilizes all industries which typically includes us receiving percentage based fees for brokerage services as well as commissions when implementing insurance based plans. Haft does not work for any particular financial company or industry nor should this column be construed as an endorsement or condemnation for any particular product. Readers should note that all views and vendor recommendations as expressed in this article are solely the author’s and do not necessarily reflect the views of the AICPA CPA Insider™ or the AICPA.
This article is not intended to provide tax or legal advice and should not be relied upon as such. Any specific tax or legal questions concerning the matters described in this article should be discussed with your tax or legal advisor