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I'm in the process of readjusting my taxable portfolio. It is about 51 percent equities, and I'd like to bring that down to about 40%.

The problem is that all of the positions show big gains. OK...they are long-term, but I'm afraid that sales will leave me with a big income tax bill next year.

In the past, I've offset gains with losses. What other strategies could I use?

Thanks.

Jack
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No. of Recommendations: 26
I'm in the process of readjusting my taxable portfolio. It is about 51 percent equities, and I'd like to bring that down to about 40%.

The problem is that all of the positions show big gains. OK...they are long-term, but I'm afraid that sales will leave me with a big income tax bill next year.

In the past, I've offset gains with losses. What other strategies could I use?


Get some information about an overpriced stock in a company that's about to file bankrupcy, buy a lot of it, lose your investment, et voila! No cap gain to worry about when everything nets on your Schedule D.

Or you could count your blessings that you've nothing but winners and pay your maximum 15% tax on long-term cap gains. You can, of course, just leave things alone and not rebalance, but I assume that there's a reason you want to reduce your equity exposure. Don't let the tax tail wag the investment dog.

Phil
Rule Your Retirement Home Fool
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Instead of making a cash donation, donate appreciated stock.

Otherwise, don't let your fear of paying taxes turn a gain into a loss.
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Don't let the tax tail wag the investment dog.

WOOF!!!! (thank you)

Jack
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If paying 15% of your gains in taxes is bothersome, why not keep it until the folks in charge of the House of Representatives gets what they want - at that point there is a very good change your stocks will drop dramatically - you might even have some of those losses that you seem to crave.

Gordon
Atlanta
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In 1999 I decided I would do some sales based on the froth of the market. I sold out my entire positions in AOL (owned since early 1995), in Cisco (ditto), and in a couple of other positions which had gotten wildly out of hand. I also sold a few where the ride had been up and back down (Lucent, @Home, MCI, IIRC, sue me if I'm wrong), and I had one or two small losers which helped offset just a trifle.

My tax bill that year was into six figures and yes, it hurt. It felt significantly better when the NASDAQ crumbled, AOL went from 150 to 15, and Cisco fell all over itself trying to mop the floor with its overpriced pieces of paper.

The government made some money with me. I did better for myself by doing what I thought I should. Marti said it best: don't let the tax tail wag the investment dog.
 
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The government made some money with me. I did better for myself by doing what I thought I should. Marti said it best: don't let the tax tail wag the investment dog.

Thanks, Goofy!

What do YOU think is going to happen to the Market on Monday?

Jack
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If I knew that Jack I could be a millionaire on Tuesday or at least by the settlement date ... I could wait ;)

Rich
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What do YOU think is going to happen to the Market on Monday?

Does it matter? What can you do today, when the market is closed, that will make any difference?
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What do YOU think is going to happen to the Market on Monday?

Depends a lot on whether there's an announcement today ;)

Otherwise, get up early, look at the pre-market figures around 9:00, and if you're in a panic and nobody else is, sell. If you're in a panic and everybody else is, take a bath. If you're not in a panic, sit tight for the ride.

Personally I'm surprised the market hasn't sold off more up to this point. I'm expecting Monday to be really interesting.
 
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Does it matter? What can you do today, when the market is closed, that will make any difference?

I try to put in all of my buy/sell orders when the market is closed. Cuts out a lot of emotional reactions.

Jack
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Jack - You have gotten good advice from the posters, but thought of another aspect to your question. IRS rules allow for specific identification of shares to establish your cost basis in the shares. Since your objective is to readjust from 51% - 40%, you are obviously not selling all your equity holdings. My advice is to look at the various purchases that you have bought over the years in detail. Some of the blocks of purchases may have more favorable cost basis than others, of the same stock. For instance, you may have bought XYZ Corp at $10 in July of 2008, and then bought XYZ at $14 two months later. By identifying your sale as coming from the $14 purchase block, you have a better tax outcome. Of course, the sales need to be identifiable to a specific purchase, and you must so identify at the time of sale.

By applying more attention to detail, you may be able to reduce the tax impact of making this portfolio adjustment.

Bob
Tax Preparer Learning Systems, LLC
www.taxpreparerlearningsystems.com
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Thank you, Bob. I like that idea. I take it that it could be
applied to mutual funds as well as individual stocks, right?

BTW....I've already started liquidating a few positions. I started
with the ones that I had the least confidence in.

Meanwhile, I have a rather large position in one mutual fund. I've had it for many years, and it has appreciated very nicely. TOO nicely....the cap gains will be significant.

But, I do buy the "tax tail vs investment dog" argument. Based on the fact that the fund position is too large, it will need to be trimmed.

Jack
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Yes, you can use specific identification method if you have records to support the cost basis you are using, and your broker can execute a specific identification sale. However, per the IRS, once you choose a method for a particular fund, you must stick with it. That means that if, for a specific fund, you at one time used average cost basis to report basis, you must continue to use average cost basis. Below is an excerpt from an IRS frequently asked question posting.

Once you elect to use an average basis method:
You must continue to use it for all accounts in the same fund.

Good luck.

Bob
Tax Preparer Learning Systems, LLC
www.taxpreparerlearningsystems.com
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Yes, you can use specific identification method if you have records to support the cost basis you are using, and your broker can execute a specific identification sale. However, per the IRS, once you choose a method for a particular fund, you must stick with it.

A clarification here. You can use specific identification or FIFO and then later decide to switch to average basis for your remaining shares in a fund. However, as noted, once you use average basis the first time for a fund you must continue using it for all remaining shares in the fund.

See Pub 564.

Phil
Rule Your Retirement Home Fool
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Thank you, Bob.

Jack
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