In this episode of Beyond Investments, Seth and Rick discuss some financial history (like when Intel went public!) in Part 1. In Part 2, they discuss voting and the upcoming election, including financial topics related to the election such as tax policies.
Managing Your Taxable Investments
By Frederick “Rick” Fisher, MS, CFP®, CA Insurance Lic#OC90003
First published in The Union | Download the PDF
As a full-service financial planning firm, we address many issues regarding our clients’ finances. For example, over the years, we have advised many clients on how best to manage the tax ramifications of repositioning a taxable portfolio. Unlike changes in qualified retirement plans and IRAs, recommending changes in taxable accounts can be complicated when significant gains and/or losses are involved.
Investors need to weigh the costs and benefits of the transaction. When a gain is involved, the main benefit is realization of the gain and possible protection of that gain, with the ability to reinvest or spend some of the money that is freed up by the sale. The cost, however, is the taxes that will need to be paid on that gain. The good news is that the tax is based on the gain on the sale and not on the total proceeds. In addition, the rate on capital gains is generally lower than the rate on other types of income, such as salary which is taxed at ordinary taxes rates.
To illustrate, we will take the hypothetical case of George and Gina Stewart. They are in their early 60s and in the final push for retirement. George currently has stock from his previous employer that he obtained through options that were granted him. He was able to buy 5000 shares of stock at $5 per share and now, 10 years later, they are worth $80 per share. Up until now, the Stewarts had resisted selling any stock because they were both still working, did not need the income, and wanted to defer paying taxes on any gains till they needed the money during retirement. Now that retirement was nearing, they wanted to come up with a plan to turn those appreciated shares into cash while minimizing the tax ramifications.
Our first step was to calculate what the gain would be if stock were sold today. Currently, that would be $75 per share of stock sold.
Second, we charted out cash flow needs over the next 5 years. When would they would be eligible for Social Security and other pensions? The issue now was when to sell. If we sold all today, we would have an enormous gain of $375k and a potential tax bill of $75k. However, the Stewarts would still net $325k ($400k-$75k), a nice return on a $25k investment. The couple still liked the stock and saw no need to sell it all now, but we were not guaranteed that the stock would continue to grow and worried about the stock falling sometime within the next 5 years.
Upon review of their other holdings, we noticed that some smaller positons had losses. Since you can offset gains with losses, we looked at possibly selling just enough shares to take advantage of the losses and minimize the capital gains taxes. We also discussed putting upper and lower limits on the stock price where we would sell some to lock in gains and minimize losses.
In the end, we came up with a plan to trim the stock over the next 5 years, which would give the Stewarts the cash they need during retirement and minimize the tax effects of the sale.
When it comes to investing, once must always consider taxes when evaluating a taxable portfolio and come up with a strategy to mitigate them. Protecting gains by selling high may leave you with more money than selling when the stock falls.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Frederick Fisher is a Registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial.
For questions or suggestions, contact Frederick at (530) 273-4425, or frederick.fisher@lpl.com, or visit ostrofefinancial.com. Branch address: 420 Sierra College Drive, Suite 200, Grass Valley.
Have You Checked Off These 7 Potential Tax Savings Ideas Before Year-End?
By Allen Ostrofe | Published in The Union | Download the PDF
Elizabeth and Mark recently called from Los Gatos, California, and had left a voicemail that had a tone of anxiety. The year had gone by so quickly they weren’t certain whether their year-end financial and tax planning was adequate. Elizabeth is self-employed as an independent contractor, and Mark is employed as a software engineer in Silicon Valley. Their earnings place them squarely in one of the higher tax brackets. They called wondering what tools are still available to use before December 31 of this year to save federal and/or state taxes. I suggested they consider the following seven ideas—some of these may apply to you, as well.
1. Charitable donations. Mark and Elizabeth need to focus more on available write-offs. They could check that they can still itemize under the new tax laws. Charitable non-profit organizations will gladly take their in-kind donations or cash before year-end. They need to make certain that they receive and retain detailed receipts, even photos, of goods they have donated. Make certain that the organization is a qualified 501(c)(3) non-profit. For larger items such as income-producing assets or parcels of land, they should consider a charitable remainder trust or a conservation easement with the aid of their Certified Financial Planner (CFP®) and estate planning attorney.
2. Quarterly estimates. Nothing is more frustrating than to have major financial surprises next March or April. Mark and Elizabeth should provide year-to-date income information to their tax preparer to confirm they are current with their quarterly estimated payments. In some cases, their remaining estimated payments (both federal and state) may be able to be reduced based upon this year’s updated income and expense information.
3. Retirement plan contributions. Mark, being an employee, should check with his CFP® to see whether he might qualify to max out his contributions to his 401(k), through salary deferrals, before year-end. For Elizabeth, being self-employed, it is not too late to establish a SEP IRA retirement plan. Both Mark and Elizabeth could potentially reduce their taxable income dollar-for-dollar with any contributions made before December 31. Elizabeth can even make contributions to her SEP IRA up until they file their tax return. They should also check with their CFP® or tax preparer about whether they can additionally make a tax-deductible IRA contribution or even Roth IRA contribution.
4. Get your personal finances organized now. Now is the best time for Mark and Elizabeth to start collecting all of their tax-related paperwork such as income-to-date, expenses, and donations. They should make their tax preparer aware of any financial changes they have had in comparison to tax year 2018. If they are so inclined, they should create a spreadsheet to track tax-relevant data. This helps in avoiding giving their tax preparer “a box of paperwork” in March or April. The more streamlined they keep their paperwork, the lower their tax preparation fee will likely be.
5. Organize your business finances now. For Elizabeth, the business owner: she should consider using, or updating, a spreadsheet or software such as Quickbooks. Make your tax preparer aware of your year-to-date gross income, capital expenses, and equipment purchases, especially where there have been significant changes from the previous year. Have there been any changes in your business status, e.g., changing from sole proprietor to a corporation?
6. Check your tax withholdings. For Mark, who is an employee: he should check and report to their tax preparer all of his year-to-date federal and state tax withholdings to avoid potential unwanted surprises next March or April. This could potentially provide the tax preparer enough time to make changes in withholding prior to year-end.
7. Investment gains and losses. Working with their CFP®, Mark and Elizabeth can take advantage of any losses that are currently unrealized within their non-retirement plan investment accounts. Realized capital losses can be used to offset any capital gains as well as up to $3,000 of ordinary income. Reviewing expected year-end capital gains distributions from mutual funds and ETF’s is another important step for Mark and Elizabeth to pursue their goal of no unwanted tax surprises.
If you feel that the tax year 2019 has crept up on you too quickly, and you feel uncertain or frustrated, take heart! This is a great time of year, before the holidays, to get your financial life under control, and aim to save paying unnecessary taxes to boot!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Allen Ostrofe, MBA, CFP®, is President Emeritus of Ostrofe Financial Consultants, Inc., with clients in 32 states and is a registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial. For questions or suggestions, visit ostrofefinancial.com. Branch address: 420 Sierra College Drive, Suite 200, Grass Valley.