November 18, 2014 8:30 am

Year-End Tax Planning for Your Securities

This year has been a bumpy ride on Wall Street, with dramatic swings up and down. Now is a good time to review your retirement account and your personal portfolio. While changes you make in your retirement account won’t impact current taxes (no gain or loss is reported on transactions in your IRA or other retirement account), the actions you take in your personal portfolio (your taxable account) will affect your taxes for 2014.

Review actualized and potential transactions

Look at the gains or losses you’ve already taken this year. Also look at your paper gains and losses that could be actualized before the end of the year. Then decide on your course of action, keeping in mind these factors:

  • Capital loss carryovers from 2013 can be used to offset gains you take this year.
  • Capital losses can offset capital gains, with losses in excess of gains used to offset up to $3,000 of ordinary income. Any excess capital losses can be carried over and used in the same manner in later years. There is no limit on the years in which capital loss carryovers can be used.
  • Short-term capital gains (gains on securities held 1 year or less and taxed at regular tax rates) can be offset by both long-term and short-term capital losses (although there is an ordering rule on how the losses are applied).
  • Mutual funds may make capital gain distributions from mutual funds later in the year or even early next year for 2014. You can contact the fund to ask whether distributions are planned.
  • Reacquiring substantially identical securities to ones sold at a loss within 30 days before or after the date of sale prevents immediate loss recognition. This is called the wash sale rule.
  • Giving appreciated securities held long term to charity produces a double tax benefit: gains aren’t taxed, while you can take a charitable contribution deduction based on the fair market value of the donation.

Remember, securities transactions should be based primarily on investment decisions; tax results are only one factor in making these decisions.

Added tax costs

In deciding whether to actualize more gains, consider the 3.8% additional Medicare tax on net investment income. While long-term capital gains are usually taxed at 15% (0 for those in the 10% or 15% tax bracket; 20% for those in the 39.6% tax bracket), there is more than just income tax to consider. The 3.8% tax applies to the lesser of:

  • Modified adjusted gross income over $200,000 for singles and $250,000 for joint filers, or
  • Net investment income

Factoring in this added tax means your effective rate is 18.8% (23.8% for top tax bracket filers).

Take RMDs

Those who are 70½ years old or older must take required minimum distributions (RMDs) from IRAs and qualified plans (with some exceptions) for 2014 based on their account balance at the end of 2013. Unless you have a cash position sufficient to cover your RMD requirements, you’ll need to sell securities. Review your holdings now to determine what sales to make.

Note: The opportunity to make a direct transfer from an IRA to a public charity up to $100,000 for those at least 70½ expired at the end of 2013 but could be extended for 2014. These transfers can include amounts to cover RMD requirements. Check for any legislative update.


Year-end selling can be a way to reposition your portfolio for better investment returns. Of course, your year-end securities transactions in your taxable accounts may impact your tax bill for the year. As such, be sure to adjust your estimated taxes (the final installment is due January 15, 2015). Alternatively, if you have a job, you can ask your employer to adjust your income tax withholding for the remainder of the year to account for any additional taxes you expect to owe.