Tax Tips For The Individual Investor
Tax-Deferred Programs Are Like Free Money
Every time you trade a stock, you are vulnerable to capital gains tax. Making your purchases through a tax-deferred account can save you a pile of money. Tax-deferred accounts come in many shapes and sizes. The most well known are individual retirement account (IRA) and simplified employment pension (SEP) plans. The basic idea is that you are not taxed on the funds until you withdraw, at which point you are taxed at the rate of your income tax bracket. Waiting to cash in until after you retire will save you even more because your income will likely be lower when you are no longer working and earning a steady income.
Also, while the benefits of tax-deferred accounts are substantial on their own, they provide an additional benefit of flexibility, as investors need not be concerned with the usual tax implications when making trade decisions. Provided you keep your funds inside the tax-deferred account, you have the freedom to close out of positions early if they have experienced strong price appreciation, without regard to the higher tax rate applied to short-term capital gains.
Read more: http://www.investopedia.com/articles/01/112801.asp#ixzz1bIdPOkcb
Read more: http://www.investopedia.com/articles/basics/08/advice-portfolio-management-administration.asp#ixzz1bIbeo4tu
Wednesday, October 19, 2011
What You Get When You Pay For Investment Services
Administration
Of the three components, administration is the one that you will be least able to do on your own. Any registered broker/dealer has access to many equity, fixed-income and commodities markets through which they can buy and sell. For a host of reasons, you are not able to go directly to these markets yourself. As such, this is a subcomponent that you will have to outsource and pay for in the form of some fee or commission. Fortunately, with online discount brokerages, the costs associated with trading are minimal. In addition, these costs cover trade settlement, confirmations, and other client statements, all of which are in compliance with mandated regulations. There are some other administrative services, however, that are not automatically supplied by your brokerage firm.
While year-end reporting for tax purposes is required, not all brokerage firms track cost basis for you. This is something you can do yourself with a spreadsheet or even a notepad, but depending on the number of holdings you have it can be a time-intensive. In choosing a brokerage firm, try to find one that keeps accurate track of your cost basis. It will save you time when you prepare your tax returns each year. (For more insight, read How do I figure out my cost basis on a stock investment?)
Another important administration function you can handle yourself is performance reporting. Truly accurate reporting, however, will be almost impossible without some fairly sophisticated software that keeps track of all cash flows and is able to calculate time-weighted total rate of return. If your brokerage firm can do this for you at no additional charge, you are receiving a material increase in value.
Read more: http://www.investopedia.com/articles/basics/08/advice-portfolio-management-administration.asp#ixzz1bIbXwVXq
Of the three components, administration is the one that you will be least able to do on your own. Any registered broker/dealer has access to many equity, fixed-income and commodities markets through which they can buy and sell. For a host of reasons, you are not able to go directly to these markets yourself. As such, this is a subcomponent that you will have to outsource and pay for in the form of some fee or commission. Fortunately, with online discount brokerages, the costs associated with trading are minimal. In addition, these costs cover trade settlement, confirmations, and other client statements, all of which are in compliance with mandated regulations. There are some other administrative services, however, that are not automatically supplied by your brokerage firm.
While year-end reporting for tax purposes is required, not all brokerage firms track cost basis for you. This is something you can do yourself with a spreadsheet or even a notepad, but depending on the number of holdings you have it can be a time-intensive. In choosing a brokerage firm, try to find one that keeps accurate track of your cost basis. It will save you time when you prepare your tax returns each year. (For more insight, read How do I figure out my cost basis on a stock investment?)
Another important administration function you can handle yourself is performance reporting. Truly accurate reporting, however, will be almost impossible without some fairly sophisticated software that keeps track of all cash flows and is able to calculate time-weighted total rate of return. If your brokerage firm can do this for you at no additional charge, you are receiving a material increase in value.
Read more: http://www.investopedia.com/articles/basics/08/advice-portfolio-management-administration.asp#ixzz1bIbXwVXq
Tax-Loss Harvesting: Reduce Investment Losses
What Is Tax-Loss Harvesting?
Imagine that on the first day of any given year, you invest $100,000 in the U.S. stock market via an exchange-traded fund (ETF), like S&P depositary receipts (SPDR). Let's assume this ETF trades off by 10%, falling to a market value of $90,000. Rather than feeling sorry for yourself, you can sell the ETF and reinvest the $90,000 back into the stock market.
Although you are keeping your market exposure constant, for IRS tax purposes, you just realized a loss of $10,000. You can use this loss to offset taxable income - leading to incremental tax savings or a bigger refund. Since you kept your market exposure constant, there really hasn't been a change in your investment cash flow, just a potential cash benefit on the tax return. (Read more about SPDRs in What is a spider and why should I buy one?)
Now let's say that the market reverses course and heads north, surpassing your initial investment of $100,000 and closing out the year at $108,000, yielding the average 10% pretax return when adding a typical 2% dividend yield. For ease of calculation, let us assume that your marginal tax rate is 50%. Had you done nothing except buy-and-hold in the aforementioned scenario, you would have an after-tax return of 9%, represented by an 8% unrealized investment gain plus a 1% dividend gain (2% dividend less 1% paid in tax to the government due to a 50% marginal tax rate).
Read more: http://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp#ixzz1bIb8NwRh
Imagine that on the first day of any given year, you invest $100,000 in the U.S. stock market via an exchange-traded fund (ETF), like S&P depositary receipts (SPDR). Let's assume this ETF trades off by 10%, falling to a market value of $90,000. Rather than feeling sorry for yourself, you can sell the ETF and reinvest the $90,000 back into the stock market.
Although you are keeping your market exposure constant, for IRS tax purposes, you just realized a loss of $10,000. You can use this loss to offset taxable income - leading to incremental tax savings or a bigger refund. Since you kept your market exposure constant, there really hasn't been a change in your investment cash flow, just a potential cash benefit on the tax return. (Read more about SPDRs in What is a spider and why should I buy one?)
Now let's say that the market reverses course and heads north, surpassing your initial investment of $100,000 and closing out the year at $108,000, yielding the average 10% pretax return when adding a typical 2% dividend yield. For ease of calculation, let us assume that your marginal tax rate is 50%. Had you done nothing except buy-and-hold in the aforementioned scenario, you would have an after-tax return of 9%, represented by an 8% unrealized investment gain plus a 1% dividend gain (2% dividend less 1% paid in tax to the government due to a 50% marginal tax rate).
Read more: http://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp#ixzz1bIb8NwRh
Using Tax Lots: A Way To Minimize Taxes Read more:
Using Tax Lots to Your Advantage
Your choice of cost basis method can have a significant effect on the computation of capital gains and losses when you sell shares. For mutual fund shares, there are three common ways to identify the cost basis of the shares that you are selling: FIFO (first-in, first-out), average-cost method and specific-share method. For stocks, you could use FIFO, LIFO (last-in, first out) or specific shares. (For background reading on FIFO and LIFO, see Inventory Valuation For Investors.)
Read more: http://www.investopedia.com/articles/05/taxlots.asp#ixzz1bI6f3Ifq
http://www.investopedia.com/articles/05/taxlots.asp#ixzz1bI6Vg2kY
Your choice of cost basis method can have a significant effect on the computation of capital gains and losses when you sell shares. For mutual fund shares, there are three common ways to identify the cost basis of the shares that you are selling: FIFO (first-in, first-out), average-cost method and specific-share method. For stocks, you could use FIFO, LIFO (last-in, first out) or specific shares. (For background reading on FIFO and LIFO, see Inventory Valuation For Investors.)
Read more: http://www.investopedia.com/articles/05/taxlots.asp#ixzz1bI6f3Ifq
http://www.investopedia.com/articles/05/taxlots.asp#ixzz1bI6Vg2kY
Investment Basis
Investment Basis
The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. It is used to calculate the capital gain or loss on an investment for tax purposes.
At the most basic level, the cost basis of an investment is just the total amount invested into the company plus any commissions involved in the purchase. This can either be described in terms of the dollar amount of the investment, or the effective per share price that you paid for the investment.
The calculation of cost basis can be complicated, however, due to the many changes that will occur in the financial markets such as splits and takeovers. For the sake of simplicity, we will not include commissions in the following examples, but this can be done simply by adding the commission amount to the investment amount ($10,000 + $100 in commissions = $10,100 cost basis).
Imagine that you invested $10,000 in ABC Inc., which gave you 1,000 shares in the company. The cost basis of the investment is $10,000, but it is more often expressed in terms of a per share basis, so for this investment it would be $10 ($10,000/1,000). After a year has passed, the value of the investment has risen to $15 per share, and you decide to sell. In this case, you will need to know your cost basis to calculate the tax amount for which you are liable. Your investment has risen to $15,000 from $10,000, so you face capital gains tax on the $5,000 ($15 - $10 x 1,000 shares). (For further reading, see A Long-Term Mindset Meets Dreaded Capital Gains Tax and Tax Tips For The Individual Investor.)
If the company splits its shares, this will affect your cost basis per share. Remember, however, that while a split changes an investor's number of shares outstanding, it is a cosmetic change that affects neither the actual value of the original investment, nor the current investment. Continuing with the above example, imagine that the company issued a 2:1 stock split where one old share gets you two new shares. You can calculate you cost basis per share in two ways: First, you can take the original investment amount ($10,000) and divide it by the new amount of shares you hold (2,000 shares) to arrive at the new per share cost basis ($5 $10,000/2,000). The other way is to take your previous cost basis per share ($10) and divide it by the split factor (2:1). So in this case, you would divide $10 by 2 to get to $5. (For more insight, check out Understanding Stock Splits.)
However, if the company's share price has fallen to $5 and you want to invest another $10,000 (2,000 shares) at this discounted price, this will change the total cost basis of your investment in that company. There are several issues that come up when numerous investments have been made. The Internal Revenue Service (IRS) says that if you can identify the shares that have been sold, then their cost basis can be used. For example, if you sell the original 1,000 shares, your cost basis is $10. This is not always easy to do, so if you can't make this identification, the IRS says you need to use a first in, first out (FIFO) method. Therefore, if you were to sell 1,500 shares, the first 1,000 shares would be based on the original or oldest cost basis of $10, followed by 500 shares at a cost basis of $5. This would leave you with 1,500 shares at a cost basis of $5 to be sold at another time.
In the event that the shares were given to you as a gift, your cost basis is the cost basis of the original holder, or the person who gave you the gift. If the shares are trading at a lower price than when the shares were gifted, the lower rate is the cost basis. If the shares were given to you as inheritance, the cost basis of the shares for the inheritor is the current market price of the shares on the date of the original owner's death. There are so many different situations that will affect your cost basis and because of its importance with regards to taxes, if you are in a situation in which your true cost basis is unclear, please consult a financial advisor, accountant or tax lawyer.
For more on how to use cost basis, check out Using Tax Lots: A Way To Minimize Taxes.
Read more: http://www.investopedia.com/ask/answers/05/costbasis.asp#ixzz1bI6AXf00
http://www.investopedia.com/ask/answers/05/costbasis.asp#axzz1bHV9enOg
The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. It is used to calculate the capital gain or loss on an investment for tax purposes.
At the most basic level, the cost basis of an investment is just the total amount invested into the company plus any commissions involved in the purchase. This can either be described in terms of the dollar amount of the investment, or the effective per share price that you paid for the investment.
The calculation of cost basis can be complicated, however, due to the many changes that will occur in the financial markets such as splits and takeovers. For the sake of simplicity, we will not include commissions in the following examples, but this can be done simply by adding the commission amount to the investment amount ($10,000 + $100 in commissions = $10,100 cost basis).
Imagine that you invested $10,000 in ABC Inc., which gave you 1,000 shares in the company. The cost basis of the investment is $10,000, but it is more often expressed in terms of a per share basis, so for this investment it would be $10 ($10,000/1,000). After a year has passed, the value of the investment has risen to $15 per share, and you decide to sell. In this case, you will need to know your cost basis to calculate the tax amount for which you are liable. Your investment has risen to $15,000 from $10,000, so you face capital gains tax on the $5,000 ($15 - $10 x 1,000 shares). (For further reading, see A Long-Term Mindset Meets Dreaded Capital Gains Tax and Tax Tips For The Individual Investor.)
If the company splits its shares, this will affect your cost basis per share. Remember, however, that while a split changes an investor's number of shares outstanding, it is a cosmetic change that affects neither the actual value of the original investment, nor the current investment. Continuing with the above example, imagine that the company issued a 2:1 stock split where one old share gets you two new shares. You can calculate you cost basis per share in two ways: First, you can take the original investment amount ($10,000) and divide it by the new amount of shares you hold (2,000 shares) to arrive at the new per share cost basis ($5 $10,000/2,000). The other way is to take your previous cost basis per share ($10) and divide it by the split factor (2:1). So in this case, you would divide $10 by 2 to get to $5. (For more insight, check out Understanding Stock Splits.)
However, if the company's share price has fallen to $5 and you want to invest another $10,000 (2,000 shares) at this discounted price, this will change the total cost basis of your investment in that company. There are several issues that come up when numerous investments have been made. The Internal Revenue Service (IRS) says that if you can identify the shares that have been sold, then their cost basis can be used. For example, if you sell the original 1,000 shares, your cost basis is $10. This is not always easy to do, so if you can't make this identification, the IRS says you need to use a first in, first out (FIFO) method. Therefore, if you were to sell 1,500 shares, the first 1,000 shares would be based on the original or oldest cost basis of $10, followed by 500 shares at a cost basis of $5. This would leave you with 1,500 shares at a cost basis of $5 to be sold at another time.
In the event that the shares were given to you as a gift, your cost basis is the cost basis of the original holder, or the person who gave you the gift. If the shares are trading at a lower price than when the shares were gifted, the lower rate is the cost basis. If the shares were given to you as inheritance, the cost basis of the shares for the inheritor is the current market price of the shares on the date of the original owner's death. There are so many different situations that will affect your cost basis and because of its importance with regards to taxes, if you are in a situation in which your true cost basis is unclear, please consult a financial advisor, accountant or tax lawyer.
For more on how to use cost basis, check out Using Tax Lots: A Way To Minimize Taxes.
Read more: http://www.investopedia.com/ask/answers/05/costbasis.asp#ixzz1bI6AXf00
http://www.investopedia.com/ask/answers/05/costbasis.asp#axzz1bHV9enOg
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