Year-End Stock Tax Tips

Investors are required to pay taxes on capital gains when they sell a stock and on the dividends they receive. Although there is not a way to eliminate the taxes altogether, there are ways to reduce the amount of taxes you owe. With a little preparation and planning you can minimize your tax liability.

Review Your Capital Gains for the Year
The first step in reducing your tax liability is to analyze the gains you have made on your investments during the year. By the end of November, look over your investment transactions. Write down all of your realized capital gains. A realized gain is a gain on an investment that you have actually sold. Note whether the investment was held long term or short term. A long term investment is an investment held for more than a year. A short term investment is an investment that was held for less than a year.
Sell Losing Stocks to Offset Taxes on Winning Stocks
After you write down all of your long and short term capital gains you can look for ways to offset the gains with loses. The IRS allows you to offset capital gains with capital loses. Look at your current stock holdings. Note any holdings that are trading below the price you paid. Decide if it makes sense to sell these stocks for a loss to offset your capital gains. Remember that the Internal Revenue Service requires that long-term capital gains must be offset by long-term loses and short-term capital gains must be offset by short-term loses. An investor should never make a decision solely for tax reasons, but tax implications should play a part in all investment decisions.
Postpone Selling a Winner
If it is near the end of the year and you have a capital gain on stock that you still own, it may make sense to postpone selling that stock until the beginning of the following year. Postponing the sale until the following year will delay any tax liability to the next year. Although you will still owe the same amount of tax on the transaction you get to defer the payment for a year.
Make the Maximum IRA Contribution
Contributions to a traditional individual retirement account are tax-deductible. If you have the ability, contribute the maximum amount allowed to your IRA. In 2009, the maximum contribution for a person under 50 was $5,000, while the maximum contribution allowed for those over 50 was $6,000. The deadline for contributing to an IRA is April 15 following the end of the tax year.


Internal Revenue Service

Morgan Stanley

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