Investment Strategies:

Tax Tips for Investors

  • Do not let your client give in to the temptation to treat commissions paid as investment expenses and claim it as an itemized deduction. Brokerage commissions can only be used to decrease your client's gain or increase their loss on the purchase and sale of stock. Your client receives their tax benefit from the commission expense when they add it to the actual purchase price of the stock when the stock is sold.
  • Investing in small business stock is a good idea. This is because if your client realizes a capital gain after holding the stock for more than five years, 50% of the gain may be excluded when they sell or exchange the stock.
  • Your client should be careful when taking losses against their gains. They'll want to keep their long-term gains in tact by offsetting any losses against short-term gains when possible. This is because of the preferred tax rate that is applied to long-term gains as opposed to short-term ones.
  • For tax purposes, your client uses the trade date for gains and losses
  • Don't forget that when your client's capital losses exceed their capital gains, up to $3,000 of the unused losses can be deducted from their income on Schedule D.
  • Keep in mind that your client may give away the long-term portion of their futures without recognizing the gain.
  • Consider transferring appreciated stock or other capital assets that your client is thinking of selling to their child if he is over the age of 13. As long as the child's other taxable income does not exceed $25,750 for 1999, they can take advantage of the 10% tax rate for net capital gains.
  • Determine if your client is a trader or an investor. Investors are allowed deductions for expenses as an itemized deduction subject to the 2% floor limit and the 3% phase out. Traders are not subject to these limitations. To qualify as a trader, they must carry out transactions for others, not just for themselves.
  • Make sure your client considers their reinvested dividends as additional purchases of stock, at a different price. Many people make the mistake of not accounting for their cost basis for dividends they receive and have reinvested back into a mutual fund in the form of additional shares, therefore getting taxed twice.
  • If your client is considering cashing out a direct investment plan within the next year, they may want to stop investing in it a year before they want to sell it. This way all of their gains may be considered long-term, their taxes will be lower and much easier to calculate.