Investors: Avoid These 5 Common Tax Mistakes

For many investors, and even some tax professionals, sorting through the complex IRS rules on investment taxes can be a nightmare. Pitfalls abound, and the penalties for even simple mistakes can be severe. As April 15 rolls around, keep the following five common tax mistakes in mind ? and help keep a little more money in your own pocket.

1. Failing To Offset Gains

Normally, when you sell an investment for a profit, you owe a tax on the gain. One way to lower that tax burden is to also sell some of your losing investments. You can then use those losses to offset your gains.

Say you own two stocks. You have a gain of $1,000 on the first stock, and a loss of $1,000 on the second. If you sell your winning stock, you will owe tax on the $1,000 gain. But if you sell both stocks, your $1,000 gain will be offset by your $1,000 loss. That's good news from a tax standpoint, since it means you don't have to pay any taxes on either position.

Sounds like a good plan, right? Well, it is, but be aware it can get a bit complicated. Under what is commonly called the "wash sale rule," if you repurchase the losing stock within 30 days of selling it, you can't deduct your loss. In fact, not only are you precluded from repurchasing the same stock, you are precluded from purchasing stock that is "substantially identical" to it ? a vague phrase that is a constant source of confusion to investors and tax professionals alike. Finally, the IRS mandates that you must match long-term and short-term gains and losses against each other first.

2. Miscalculating The Basis Of Mutual Funds

Calculating gains or losses from the sale of an individual stock is fairly straightforward. Your basis is simply the price you paid for the shares (including commissions), and the gain or loss is the difference between your basis and the net proceeds from the sale. However, it gets much more complicated when dealing with mutual funds.

When calculating your basis after selling a mutual fund, it's easy to forget to factor in the dividends and capital gains distributions you reinvested in the fund. The IRS considers these distributions as taxable earnings in the year they are made. As a result, you have already paid taxes on them. By failing to add these distributions to your basis, you will end up reporting a larger gain than you received from the sale, and ultimately paying more in taxes than necessary.

There is no easy solution to this problem, other than keeping good records and being diligent in organizing your dividend and distribution information. The extra paperwork may be a headache, but it could mean extra cash in your wallet at tax time.

3. Failing To Use Tax-managed Funds

Most investors hold their mutual funds for the long term. That's why they're often surprised when they get hit with a tax bill for short term gains realized by their funds. These gains result from sales of stock held by a fund for less than a year, and are passed on to shareholders to report on their own returns -- even if they never sold their mutual fund shares.

Recently, more mutual funds have been focusing on effective tax-management. These funds try to not only buy shares in good companies, but also minimize the tax burden on shareholders by holding those shares for extended periods of time. By investing in funds geared towards "tax-managed" returns, you can increase your net gains and save yourself some tax-related headaches. To be worthwhile, though, a tax-efficient fund must have both ingredients: good investment performance and low taxable distributions to shareholders.

4. Missing Deadlines

Keogh plans, traditional IRAs, and Roth IRAs are great ways to stretch your investing dollars and provide for your future retirement. Sadly, millions of investors let these gems slip through their fingers by failing to make contributions before the applicable IRS deadlines. For Keogh plans, the deadline is December 31. For traditional and Roth IRA's, you have until April 15 to make contributions. Mark these dates in your calendar and make those deposits on time.

5. Putting Investments In The Wrong Accounts

Most investors have two types of investment accounts: tax-advantaged, such as an IRA or 401(k), and traditional. What many people don't realize is that holding the right type of assets in each account can save them thousands of dollars each year in unnecessary taxes.

Generally, investments that produce lots of taxable income or short-term capital gains should be held in tax advantaged accounts, while investments that pay dividends or produce long-term capital gains should be held in traditional accounts. For example, let's say you own 200 shares of Duke Power, and intend to hold the shares for several years. This investment will generate a quarterly stream of dividend payments, which will be taxed at 15% or less, and a long-term capital gain or loss once it is finally sold, which will also be taxed at 15% or less. Consequently, since these shares already have a favorable tax treatment, there is no need to shelter them in a tax-advantaged account.

In contrast, most treasury and corporate bond funds produce a steady stream of interest income. Since, this income does not qualify for special tax treatment like dividends, you will have to pay taxes on it at your marginal rate. Unless you are in a very low tax bracket, holding these funds in a tax-advantaged account makes sense because it allows you to defer these tax payments far into the future, or possibly avoid them altogether.

David Twibell is President and Chief Investment Officer of Flagship Capital Management, LLC, an investment advisory firm in Colorado Springs, Colorado. Flagship provides portfolio management services to high-net-worth individuals, corporations, and non-profit entities. For more information, please visit www.flagship-capital.com.

In The News:


5 Reasons The Future Of Clean Energy Investing Looks Stronger Than Ever
Forbes
People don't invest in an industry to save the world or promote a cause; they invest because they believe the amount they put in will ultimately be returned to them as a much greater sum. You've got to spend money to make money and, when it comes to ...

and more »

Motley Fool

The Most Important Investing Rule
Motley Fool
When investing, what is the most important principle to keep in mind? Is it to buy "safe" stocks? Think for the long term? Or, is it something else entirely? Now, while there is no one rule that's undoubtedly the "most important", but there are ...

and more »

SFGate

Ex-techies have high hopes for investing in the cannabis field
SFGate
antioch; concord; fairfield; hayward; livermore; mill valley; mountain view; napa; oakland; palo alto; richmond; san carlos; san francisco; san jose; santa rosa. Sign InRegister. Sections. SFGatevisit|Home|navigation-www|1 · SFGatevisit|Home|navigation ...

and more »

Businessweek

Investing in Russia: So Crazy, It Just Might Work
Businessweek
On paper, there's no good reason to invest in Russia right now. The country's dealing with a collapsed currency, plunging oil prices, recession, conflict in Ukraine, sanctions, and a government that's hard to predict. The MSCI Russia Index lost almost ...


12 Thoughts About Investing and the Economy
Motley Fool
Optimism, according to psychologist Tali Sharot, is basically an efficient form of ignorance. "It protects us from accurately perceiving the pain and difficulties the future undoubtedly holds, and it may defend us from viewing our options in life as ...


Investing in Our Future at Community Colleges
New York Times
There is a human capital component to President Obama's plan to make community colleges free: return on investment. The $60 billion that would be spent over a decade is an investment in our civic future. Our return for that financial commitment should ...

and more »

Barron's

Solving the Active Vs. Passive Investing Debate
Barron's
Active versus passive. No, it's not a debate to stir the passions of the public, but in the world of investing and deciding how to gain exposure to sectors, it is a rivalry up there with the Hatfields versus the McCoys, the North versus the South, the ...


MassLive.com

How to leave a mark through investing
Daily Astorian
Impact investing is probably the most promising of these tools. Impact investing is not socially responsible investing. Socially responsible investing means avoiding certain companies, like tobacco growers. Impact investors seek out companies that are ...
David Brooks: Investing in social capitalismAlbany Times Union

all 7 news articles »

MarketWatch

10 investing temptations to avoid in 2015
MarketWatch
Alternative mutual funds — The Financial Industry Regulatory Authority (Finra) is a nonprofit organization authorized by Congress to protect investors through effective regulation of the securities industry. In January it issued a notice listing this ...


InvestmentNews

Simple due diligence rules for investing in alternatives
InvestmentNews
Advisers should keep three common due diligence principles in mind when choosing alternative investment products such as nontraded real estate investment trusts and business development companies. Those are: how much “skin in the game” the fund's ...

Google News

The Conflict of Interest Game

Disgruntled investors are going after Wall Street once again, this... Read More

Raising Capital in Today?s ?New Economy?

We've helped a number of clients develop business plans and... Read More

Forex market offers opportunity and information

The forex market is what is called an international exchange... Read More

Dont Catch a Falling Knife

One of the most common mistakes made by inexperienced investors... Read More

Asset Location ? Increase Investing Returns & Reduce Your Taxes

Location ? Once the holy grail only for real estate... Read More

Investing for Retirement - Not an All or Nothing Play

In 1519, Hernando Cortes, beached on the shores of unexplored... Read More

Wit and Wisdom on Money, Wall Street and Success - Part #4

Can you concisely summarize your investment philosophy in a few... Read More

What My Horse Had For Breakfast

Let's see, he had some oats, fresh alfalfa and his... Read More

Before You Start Investing

There maybe several reasons why you to want to invest... Read More

Retirement ? Its Sooner Than You Think!! (Honestly)

Many people hear "retirement" and think- what? 401K? Roth vs.... Read More

DXPortfolio: A Great Passive Investment of 25% to $40% per month

First, I need to explain about e-currencies or digital currencies.... Read More

How to Setup a Profitable Trading Business

In my opinion trading is the most exciting and best... Read More

The Perfect Economy?

The U.S. economic data reported this week showed strong output... Read More

Quit and Retire Three Years Earlier!

For most people, there is a direct correlation between how... Read More

How to Analyze the Veracity of Investment Newsletters

When trying to analyze whether a promotional ad for an... Read More

Invisible Mutual Fund Fees Erode Your Returns!

Many investors think that investing in mutual funds is free.... Read More

Investing and the Fear of Regret and Greed

People tend to feel sorrow and grief after having made... Read More

Making Every Penny Count

More and more workers are leaving their jobs and taking... Read More

Should You Put Your Annuity in an IRA?

Let me start by answering that question...if an annuity fits... Read More

How to Terror-Proof Your Money

"To drift is to be in hell, to be in... Read More

Powerful Options Basics Lessons Improving your trading in 180 days.

An option is a traded security that is a derivative... Read More

The Realities Of Market Timing

Market timing systems are based on patterns of activity in... Read More

Investing Online Has Its Rewards: Find Out How To Take Advantage Of Them

Computerized investing. Online investing. Have you taken the next step... Read More

My Way Or The Highway: Give Your Financial Professionals A Good Talking To!

All this talk about Investing is encouraging lately. Over the... Read More

Everybody Wants to Know How to Invest

Those unfamiliar with the process of making and managing investments... Read More