Top Year-End Investment Tips
By Steven D. Brett, President of Marcum Financial Services LLC; Branch Manager, Raymond James Financial Services, Inc.

Just what you need, right? One more time consuming task to be taken care of between now and the end of the year. But taking a little time out from holiday chores to make some strategic saving and investing decisions before December 31 can affect not only your long-term ability to meet your financial goals, but also the amount of taxes you'll owe next April.


The first step in your year-end investment planning process should be a review of your overall portfolio. That review can tell you whether you need to rebalance. If one type of investment has done well–for example, large-cap stocks–it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether rebalancing should be done before or after December 31 for tax reasons.

Also, make sure your asset allocation is still appropriate for your time horizon and goals. You might consider being a bit more aggressive if you're not meeting your financial targets, or more conservative if you're getting closer to retirement. If you want greater diversification, you might consider adding an asset class that tends to react to market conditions differently than your existing investments. Or you might look into an investment that you have avoided in the past because of its high valuation if it's now selling at a more attractive price. Diversification and asset allocation don't guarantee a profit or insure against possible loss, of course, but reviewing at least once a year is the best way to maximize their potential profitability.


When contemplating a change in your portfolio, don't forget to consider how long you've owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, your ordinary income tax rate could be much higher than the long-term capital gains rate, which applies to the sale of assets held for more than a year. For example, as of tax year 2015, the top marginal tax rate is 39.6%, which applies to any annual taxable income over $413,200 ($464,850 for married individuals filing jointly). By contrast, the long-term capital gains rate owed by taxpayers in the 39.6% tax bracket is 20%.

For most investors–those in tax brackets between 25% and 35%–long-term capital gains are taxed at 15%; taxpayers in the lowest tax brackets–15% or less–are taxed at 0% on any long-term capital gains. (Long-term gains on collectibles are different; those are taxed at 28%).

Your holding period can also affect the treatment of qualified stock dividends, which are taxed at the more favorable long-term capital gains rates. You must have held the stock at least 61 days within the 121-day period that starts 60 days before the stock's ex-dividend date; preferred stock must be held for 91 days within a 181-day window. The lower rate also depends on when and whether your shares were hedged or optioned.


Now is the time to consider the tax consequences of any capital gains or losses you've experienced this year. Though tax considerations shouldn't be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.

If you have realized capital gains from selling securities at a profit and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as "harvesting your losses."

Example: You sold stock in ABC Company this year for $2,500 more than you paid when you bought it four years ago. You decide to sell the XYZ stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. You sell your XYZ shares at a $7,000 loss. You offset your $2,500 capital gain on your ABC shares, offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.


If you're selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a "wash sale," and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.

If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies you can employ. If you want to sell but don't want to be out of the market for even a short period, you could sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You'd end up with the same position, but would have captured the tax loss.

If you're buying a mutual fund or an ETF in a taxable account, find out when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you'll owe taxes this year on that money, even if your own shares haven't appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.

Note: Before buying a mutual fund or ETF, don't forget to consider carefully its investment objectives, risks, fees and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.


Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. For example, it's generally not a good idea to hold tax-free investments, such as municipal bonds, in a tax-deferred account (e.g., a 401(k), IRA, or SEP). Doing so provides no additional tax advantage to compensate you for tax-free investments' typically lower returns. And doing so generally turns that tax-free income into income that's taxable at ordinary income tax rates when you withdraw it from the retirement account. Similarly, if you have mutual funds that trade actively and therefore generate a lot of short-term capital gains, it may make sense to hold them in a tax-advantaged account to defer taxes on those gains, which can occur even if the fund itself has a loss. Finally, when deciding where to hold specific investments, keep in mind that distributions from a tax-deferred retirement plan don't qualify for the lower tax rate on capital gains and dividends.


If you own a stock, fund or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold--for example, those bought at a certain price. Which shares you choose depends on whether you want to book capital lossesto offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account). Be aware that you must use the same method when you sell the rest of those shares.

Example: You have invested periodically in a stock for five years, paying various prices, and now want to sell some shares. To minimize the capital gains tax you'll pay on them, you could decide to sell the least profitable shares, perhaps those that were only slightly lower when purchased. Or if you wanted losses to offset capital gains, you could specify shares bought above the current price.

Depending on when you bought a specific security, your broker may calculate your cost basis for you, and will typically designate a default method to be used. For stocks, the default method is likely to be FIFO ("first in, first out"); the first shares purchased are considered the first shares sold. As noted above, most mutual fund companies use the average cost per share as your default cost basis. With bonds, the default method amortizes any bond premium over the time you own the bond. You must notify your broker if you want to use a method other than the default.


  1. Invest in municipal bonds to generate tax-free income.

    Municipal bonds become more attractive on a relative tax basis for taxpayers who find themselves subject to the 3.8% surtax and who may also be subject to the highest (39.6%) marginal rate. The tax equivalent yield, i.e., the yield an investor would require in a taxable bond investment to equal the yield of a comparable tax-free municipal bond, has increased for those taxpayers. While all bonds have risks, municipal bonds may have a higher level of credit risk as compared with government bonds and CDs. Capital gains, if any, are taxable for federal and, in most cases, state purposes. Income from federally tax-exempt funds may be subject to state and local taxes.

  2. Utilize strategies to reduce or avoid taxable income.

    Contributing to a retirement plan or IRA, funding a flexible spending account (FSA) or deferring compensation income can reduce adjusted gross income (AGI) and prevent a taxpayer from reaching key income thresholds that may result in a higher tax bill. Maximizing use of tax deductions such as charitable contributions or mortgage interest can offset income as well. Conversely, be mindful of transactions, such as the sale of a highly appreciated asset, which may increase your overall income above thresholds for the 3.8% surtax, the income phase-out of itemized deductions or the new highest marginal tax rates.

  3. Consider Roth IRA/401(k) contributions or conversions.

    A thoughtful strategy utilizing Roth accounts can be an effective way to hedge against the direction of future tax rates in light of the longer-term federal budget deficit challenge. Younger investors or taxpayers in lower tax brackets should consider using Roth accounts to create a source of tax-free income in retirement. It is virtually impossible to predict tax rates in the future or to have a good idea of what your personal tax circumstances will look like years from now. Like all income from retirement accounts, Roth income is not subject to the new 3.8% surtax and also is not included in the calculation for the $200,000 income threshold ($250,000 for couples) to determine if the new surtax applies.

  4. Asset "location": Allocate assets by tax status.

    In general, consider placing a larger percentage of your stock holdings outside of retirement accounts and a larger percentage of your fixed-income holdings inside retirement accounts. With respect to stock investments, allocating a greater proportion of your buy-and-hold or dividend-paying investments to taxable (i.e., non-retirement) accounts may increase your ability to benefit from a lower tax rate on qualified dividends and long-term capital gains.

  5. Be mindful of irrevocable trusts and taxes.

    Because of the low income threshold ($12,300 for 2015), which will subject income retained within an irrevocable trust to the highest marginal tax rates and the 3.8% Medicare surtax, trustees may want to reconsider investment choices inside of the trust (municipal bonds, life insurance, etc.). Or, maybe trustees should consider (if possible) distributing more income out of the trust to beneficiaries who may be in lower income tax brackets.

  6. Review estate planning documents and strategies.

    The permanency of the historically high $5 million exemption (indexed for inflation) may have unintended consequences for some individuals and families with wealth below that threshold. They may think that they do not have to plan for their estates. However, taxes are just one facet of estate planning. It is still critical to plan for an orderly transfer of assets or for unforeseen circumstances such as incapacitation. Strategies to consider include proper beneficiary designations on retirement accounts and insurance contracts, wills, powers of attorney, health-care directives and revocable trusts.

  7. Plan for potential state estate taxes.

    While much attention is focused on the federal estate tax exemption threshold, it is important to know that many states do have estate or inheritance taxes. There are a number of states that are “decoupled” from the federal estate tax system. This means the state applies different tax rates or exemption amounts. A taxpayer may have net worth comfortably below the $5 million exemption amount for federal estate taxes, but may be well above the exemption amount for his or her particular state. It is important to consult with your accountant or attorney on specific state law and potential options to mitigate state estate or inheritance taxes.

  8. Evaluate whether to transfer wealth during lifetime or at death.

    The unified lifetime exemption amount for gifts and estates ($5,430,000 for 2015) provides flexibility for taxpayers to decide whether to transfer wealth while living or at death. Lifetime gifting shelters appreciation of assets post-gift from potential estate taxes, helps heirs now and utilizes certain valuation discounts available through strategies such as family limited partnerships. Transferring assets at death allows individuals to maintain full control of property while living and benefit from step-up in cost basis at death.

  9. Consult with your accountant or attorney to see if more complex wealth transfer techniques may be appropriate.

    Individuals and families with significant wealth, especially within non-liquid assets such as real estate or closely held businesses, may benefit from a range of more complicated strategies to efficiently transfer wealth. Examples include grantor trusts, family limited partnerships, and dynasty trusts. Recently, there has been more scrutiny among lawmakers, which could prompt restrictions in how these strategies are implemented. It may be prudent to examine these options while they are still viable alternatives.

  10. Evaluate whether a Credit Shelter Trust (CST) makes sense.

    A properly designed CST will shelter appreciation of assets from the estate tax after the death of the first spouse. However, since the portability provision allowing a surviving spouse to utilize the unused exemption amount of a deceased spouse is permanent, is trust planning actually necessary? There are some benefits for still utilizing a credit shelter trust including protection of assets from potential creditors, spendthrift protection for trust beneficiaries, planning for state death taxes and preserving the Generation Skipping exemption, which is not portable. However, costs and effort are required to establish the trust, while the portability provision does not involve any special planning. Additionally, assets transferred to a trust at the death of the first spouse do not receive a step-up in cost basis at the death of the second spouse.