There is a well-known saying that the only things certain in life are death and taxes. As 2014 draws to a close, we know all too well that taxes are a certainty we can expect at the onset of the New Year. With that in mind, if you are taxed on total income, now is the time to talk to your advisor about what to do with any capital gains or losses in your portfolio.
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 help you avoid paying taxes 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. One key to making these decisions is to have information regarding when you acquired investments in your portfolio and what you paid for them each time. Often you may have acquired the same investment on several occasions and the tax consequences of the sale of each tax lot can be different. Your advisor can help you sort through what you might consider selling. This could help you achieve 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.
Remember, if you are taxed on investment income rather than total income, taking a loss will not help your tax situation. If you are in this position and you have less than $1.2M in premiums, you may want to consider changing your tax status. (NOTE: there is a push to raise the premium amount to $2M…stay tuned for more information on that!)
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.