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:


USA TODAY

Investing: 2 men save same, end up $234K apart
USA TODAY
Out here in Exampleland, Pete and Frank always leave Philadelphia at noon and pass Helen and Irma in Altoona at 4:30, but no one will tell you how fast they're going. And when you're planning for retirement, you can always figure out what percentage of ...

and more »

Wall Street Journal (blog)

A Scary Picture of Retirement Investing
Wall Street Journal (blog)
Just in time for Halloween, a research institute has published some downright scary data about how some people are investing in their individual retirement accounts. Fifty-six percent of IRA owners had either all of their IRA money in stocks or ...

and more »

Simply Money: The investing risk you cannot ignore
Cincinnati.com
Most people understand that risk – defined as the exposure to danger – is a classic and necessary trait of investing in stocks and bonds. Investors, either intuitively or through experience, rightly see return and risk as proportional – more risk leads ...


Business Insider

Harvest Exchange Wants To Provide Expert Investing Insight Without The Price ...
Business Insider
Throughout more than a decade working in financial services, Peter Hans noticed a pattern in his meetings: Investment professionals would gather and inevitably talk about their favorite stocks and investments. "Everyone was willing to share ideas, but ...
This Site Wants To Provide Expert Investing Insight Without The Price TagBusiness Insider Australia

all 4 news articles »

Livemint

5 Investing Factors to Consider After a Plunge in Oil Prices
U.S. News & World Report (blog)
5 Investing Factors to Consider After a Plunge in Oil Prices. As an investor, you need to know all of the factors driving down the price of oil. A pumpjack helps extract oil from a North Dakota well in August 2013. The Energy. One factor driving down ...
Oil: Poor Leading Indicator For (Recent) RecessionsInvesting.com

all 447 news articles »

Waiting For A Watershed: Entrepreneurs Press SEC To Finalize Crowdfund ...
Forbes
The result: Not only did the anticipated advent of crowdfund investing not occur in 2014, this phase of the JOBS Act enactment is now at an impasse as entrepreneurs, investors and service organizations wait for the SEC commission to act. Few deny that ...


Why Ultimate Trailing Stops Are an Essential Investing Strategy
Money Morning
They're usually automatic sell orders set at a specific percent below the market price of the investment you hold or at some predetermined dollar amount of risk on a given investment. While people typically think of trailing stops as downside ...


Statesman Journal

The best basic books on investing are small and short: Here they are
Statesman Journal
Q. I am married and both my husband and I are retired. My husband has always managed our investments but is now in declining health. I feel I should be learning the basics of investing. I have gone to presentations on the subject. And I've read your ...


Talking about investing
CT Post
I was in the training program at Shearson Lehman Brothers in New York City and decided that I wanted to be a portfolio manager once I had the chance to work with the portfolio managers at Lehman. Roger Perry, the chief investment officer at Citytrust ...


DCA Vs. Lump Sum Investing
Seeking Alpha (registration)
I have spoken before that I am a fan of the Dollar Cost Averaging (DCA) method for investing in stocks. Particularly as a way to invest a regular stream of income. In this article I present a new take on the traditional DCA approach and suggest a way ...

and more »
Google News

Who Wants To Be A Millionaire?

I am sure you have probably read about the power... Read More

How to Choose the Right Share Class

You'll want to opt for the no-load or institutional share... Read More

Bankers in Denial

Denial is a ubiquitous psychological defense mechanism. It involves the... Read More

Invest To Make Money, Not To Get Rich

The technology boom of the '90s romanticized the "rags-to-riches" ideal... Read More

Can Using Sales Leaseback Method of Investment Property Acquisition Reduce Risk?

Sales Leaseback compared to traditional property investmentCan a Sales Leaseback... Read More

Copy Cat or How to Use a Successful Trading System

How many books have you read about successful traders? How... Read More

What is an Investor Ready Business Plan

A Business Plan, as all good entrepreneurs starting out in... Read More

Annuity Owner Mistakes

Okay, so I can tell you I have sat in... Read More

Investing & Online Stock & Share Trading- The Stock & Share Markets are Booming But Be Warned

I had the pleasure of being invited on a friend's... Read More

How to Use Annual Report

There are many steps in calculating the fair value of... Read More

Volatile Range

The stock market fell sharply Thu and Fri before and... Read More

To Retire Rich, Save and Invest Early

If you want to retire rich, start saving investing early.... Read More

Investing and the Fear of Regret and Greed

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

Six Principles of Successful Investing

1. Begin investing immediatelyProcrastination is the number one enemy of... Read More

Buying a Home - Your BIGGEST Investment

This column has often focused on intangible investments like stocks... Read More

Investing Psychology Today Requires All Traders to Awaken Their Speculator Minds

Stock trading strategies are as rampant today, as they were... Read More

The Past Does Not Equal The Future: Mutual Fund Returns!

A way that investors get ripped off and in a... Read More

Economic Survival in the 21st Century - the Three Key Questions to Ask

In this "special report", I want to pose a few... Read More

Is Offshore Banking for You?

You've probably heard about people who keep their money offshore.... Read More

Gold and Silver Maple Leafs Get New Packaging

Gold Maple Leafs and Silver Maple Leafs are receiving packaging... Read More

Real Estate Clubs Hot Among Investors

Six or seven years ago, the stock market was booming,... Read More

June 2005: Weather Forecasts for Weather Traders

If Johannes Kepler, the renowned 17th century astronomer and discoverer... Read More

Success Trading: Some Basic Terminology for New Traders

The world of trading can get very complex because the... Read More

Using Divergences to Keep Out of Bad Trades

The American Football season just came to an end with... Read More

Investing: Do You Want To Make Money, Or Would You Rather Fool Around?

It always amazes me how much stock market investors resemble... Read More