Money Matters: Do not miss year-end investment management opportunities

Christmas is now a warm and delightful memory, and everyone is looking forward to ringing in the New Year with fireworks and parades. High school football champions have long since been determined. Congratulations to the Rebels and Tornados for an outstanding season! We know where our favorite college teams are headed for their post-season play. And, every football fan is watching to see who will play in Super Bowl MXLVIII! Sorry, I am sure everyone knows it is really XLII, the 42nd Super Bowl. Surely, there is nothing else to occupy our time during this break between Christmas and New Years.

Except, if you manage your own investments, this should be a week filled with number crunching, phone calls, projections, as well as buys and sells in your investments. While those managing taxable accounts with less than fifty or a hundred thousand may not be as active, those with larger taxable accounts should be. If you do not manage the accounts on your own but have a manager, you should make sure they are not on vacation during this critical week. If they are, you are most likely missing out on significant tax planning opportunities.

While the indexes such as the Dow Jones Industrial 30 or the S&P 500 have not performed exceptionally well this year, you may find the dividends and capital gains paid from your mutual funds to be higher than normal. While every fund will vary and few generalities can be used, this is an area you should review closely. This year will be remembered by many investment managers due to the number of highs that occurred during the year, only to be followed by significant corrections. For some mutual funds, this rollercoaster ride increased trading activities; and for others, it may have caused positions held for years to be partially or entirely sold.

If you are wondering why this is important, you must first understand the rules mutual funds follow. The capital gain distribution a mutual fund pays near the end of the year has nothing to do with performance for the year. Tax law specifies that a mutual fund must distribute in the form of a dividend ninety percent of their realized gains. This means, if a mutual fund has gone up in value during the year but sold very few positions to “realize” their profits or “gains” then, the capital gain distribution will not be very large. However, if the fund due to market volatility sold some or many of their positions and “realized” the gains, even if their performance for the year is low or a loss, the capital gain distribution could be very large. And if the shares are held in taxable accounts, then you will receive a 1099 and have higher income to report on your annual tax return.

The question becomes, are there steps you can take to assist in managing the tax bite taxable investment accounts may create? And, this leads us back to how busy the week between Christmas and New Years can be for investment managers that not only manage the investments, but who also manage for their clients’ tax impact such as Quality Financial Concepts (QFC) and I am sure others.

During this time, you should review the capital gains and losses you have already “realized” for the year. To do this, you should add the capital gains that have already been paid by mutual funds and estimate the gains to be paid on the last few trading days of the year. Once you know your tax impact from these gains, a review of your portfolio should take place. If you are sitting with substantial gains, you should look to see if there are any positions that if sold would help offset these gains. This includes mutual funds as well as stocks.

For mutual funds, there are two important numbers you should track. The first is the amount of money you placed in the fund. You will add to this amount if you make additions to the fund and subtract from this value the amount of any withdrawals you take from the fund. This is the easy way to see if you are up or down in a fund by comparing this “net invested” amount to the fund’s value. The second number is the tax basis. This starts out being the amount you originally invested in the fund, but then it is adjusted for any reinvested dividends or capital gains, as well as for any withdrawals taken. It is very possible for the fund’s value to be higher than the net amount invested, thus you have made money; but for the tax basis to be more than the fund’s value and thus if the fund was sold, you would have a tax loss to take on your tax return.

Professional managers will track this number and can make decisions during the last week of the year to help manage the tax impact their clients will have. So, do not miss this important opportunity to manage the potential tax impact your taxable investment accounts may create.


Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.

Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.

© 2007 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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