| BUSINESSWEEK ONLINE : JUNE 26, 2000 ISSUE | ||||||||
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| COVER STORY
Count Your Losses in Tax-Bill Gains Upside strategies for trading in a rocky market Turbulent markets can cost you more than just losses on your portfolio. Trading to beat the markets' swings can boost your tax bill as well. Even though you may feel you just dropped last year's tax return in the mail, you should keep your 2000 tax tab in mind as you navigate the choppy waters of today's unstable markets. For investors, the basic rule is simple: Look for losses to offset your gains and thus avoid taxes. The most useful losses are short-term--on assets you've owned less than a year--because they can offset short-term gains that would otherwise be taxed at up to 39.6%. You can also use losses to offset as much as $3,000 in wage and salary income. Another way to offset gains is by deducting interest paid on funds that you borrowed to invest, such as margin loans. You can't deduct more in investment expenses than you earned in dividends, interest, and other investment income. Unused deductions can be rolled over into future years indefinitely. You can increase this year's deduction if you choose to count some capital gains as investment income, says Robert Trinz, editor of RIA's Weekly Tax Alert. It's usually best to use short-term gains: Counting long-term gains as income means giving up lower capital-gains rates. That makes sense only if you have paid more interest than you expect to be able to deduct over the next two to three years. KEEP TRACK. To make best use of these strategies, you've got to keep close tabs on your portfolio. You've probably accumulated your favorite stock or fund in several transactions at different prices. You can minimize taxes by selling first the shares that cost the most. Now might be the time to try a good portfolio tracker, either a program such as Intuit Inc.'s Quicken or Microsoft Money, or an Internet-based tracker such as GainsKeeper.com, which automatically figures in stock splits. Market dips aren't all bad, especially if you hold employee stock options. Most executives who get options--either tax-favored incentive stock options (ISOs) or the more common nonqualified options--sell their stock as soon as they buy it. But you can sometimes save on taxes if you exercise options when the stock is in a slump. Let's say you have a nonqualified option to buy stock for $10. If you had exercised the option and bought at a recent $50 peak, you would owe income tax on $40--the difference between the market price and what you paid. But if you catch a dip to $25, you'll owe tax on only $15. If you hold for over a year, any increase over $25 will be taxed at lower capital-gains rates. For ISOs, the calculation is trickier. You don't pay taxes until you sell the stock--and if you hold it a year, you get lower capital-gains rates. But you might end up owing tax on the difference between an option's exercise price and its market price if you are caught by the alternative minimum tax (AMT), a parallel tax code that ensnares high-income taxpayers. Buying your ISO stock on a dip minimizes the chances of paying AMT. Plus, ''the sooner you start the clock on the one-year holding period [for capital-gains breaks], the more flexibility you'll have,'' says Martin Nissenbaum, national director of retirement planning for Ernst & Young. Down markets also create an opportunity to improve your individual retirement account. If your adjusted gross income is below $100,000, you can convert all or part of a traditional IRA to a Roth IRA. You'll have to pay taxes now on the funds you convert--but you won't have to pay them on any withdrawals five years after the switch. It's cheapest to switch when stocks are down. If you converted early this year when the market was high, and you regret it, you can undo the switch--but then you won't be allowed to move back into a Roth IRA until next year. No matter how your portfolio is faring, be sure to revisit your taxes in the fall. Then, you'll have a better grip on gains and losses. Of course, you should never let tax planning force you into bad investment decisions. But sharing your losses with Uncle Sam can ease the pain if the long bull market runs out of steam. By MIKE McNAMEE _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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