Think Taxes As You Tune Up Your Investment Portfolio

Now’s the time to review your investment performance and plan your year-end moves. As you identify winners and losers and decide what to hold and what to sell, here are some tax reminders.

  Remember that the tax rates on long-term capital gains are 15% or 5% if you’re in the lower two tax brackets. On short-term gains you’ll pay tax at ordinary income rates, which can be much higher. So try to meet the 12-month holding period on anything you sell, and enjoy the lower rates.

  If you’re planning to take losses, remember that you can use any net capital loss to offset up to $3,000 of ordinary income.

  When you’re estimating investment income for the year, remember that “qualifying” dividends are taxed at lower 15% or 5% rates. Most dividends from U.S.-traded stocks and stock mutual funds qualify, but not dividends on money market funds or bond funds. If in doubt, ask your broker or look at last year’s Form 1099.

  If you’re selling, remember to include reinvested dividends in your cost basis. You’ve already been taxed on these, so don’t pay twice

  If you’re buying, beware of the year-end capital gains trap. Many mutual funds distribute capital gains only once a year, often in December. If you buy just before the distribution, you could wind up paying tax on the whole year’s capital gains, even though you’ve held the fund for only a short time. If in doubt, check the distribution date with the fund manager.