There is a well-known saying that the only things certain in life are death and taxes. As 2013 draws to a close, we know all too well that taxes are a certainty we can expect in the not so distant future. With that in mind, now is the best time to talk to your advisor about what to do with any capital gains or losses within your portfolio to avoid tax consequences.
If investment positions need to be reduced due to a market run-up, doing so in a year when underwriting income is not strong may help your income statement look better and avoid you paying tax on that gain. If on the other hand you are having such a good year that you will owe more than you had planned in taxes, taking some capital losses in your investment portfolio can reduce your tax bite if you are taxed on all income and not just on investment income. The key to the ability to make these decisions as year-end approaches is to have the information on when you acquired each of your investments and what you paid for them each time. Often you may have acquired the same investment on several occasions and the tax consequences of sale each of the different positions (known as “tax lots”) can be different. Your advisor can help you sort through what you might consider selling to achieve sometimes vastly different results in your income report to your policyholders and on your tax return.
It is also important to keep in mind that a mutual fund could have a capital gain even if it is down overall for the year. A fund’s distribution of capital gains may be based on a transaction made earlier in the year – these distributions are taxable. Additionally, consider taking losses this year that can be used to offset future capital gains.
Harvesting capital gains and losses is not without risk. It requires careful consideration of the big picture and a thorough analysis of your particular investment mix. This is why it is important to discuss all your options with a trusted advisor who can help you weigh the tax benefits and investment risks.