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:


Investing and markets
The Economist (blog)
WHATEVER happened to emerging markets? They were supposed to bail the developed economies out of the financial crisis. And they were also supposed to provide an attractive home for growth-seeking international investors seeking to escape the ...


Forbes

Talkin' To Chuck: Q&A With Charles Schwab On Investing, Retirement & Wealth
Forbes
In the last issue of Forbes, we ran a short excerpt from an interview with brokerage legend Charles Schwab Charles Schwab in which he answered questions from our readers and shared his single best piece of investing advice (hint: it's really simple).


Are you investing ... or gambling?
Cincinnati.com
And – for a very, very small group of professionals – trading can indeed be a lucrative and successful investment strategy. But you must be crystal clear on the difference between investing versus trading. By understanding this difference, you will ...


Thinking of Investing Through Crowdfunding?
Huffington Post
In fact, a major goal of many of these so-called "crowdfunding" sites' revenue model is to attract and "register" as many accredited investors as possible. By touting large numbers of registered users, the sites can market themselves to companies who ...


How to capitalize on the 'investing evolution'
MarketWatch
In the 1980s, most people weren't involved with investing — they had pensions. Those who invested for themselves stood in a line (as opposed to being online) to check their stock prices in a Quotron machine. I remember this vividly as a Wall Street ...

and more »

Huffington Post

29 Essential Twitter Feeds for Money and Investing
Huffington Post
Betterment is the largest, fastest-growing automated investing service, helping people to better manage, protect, and grow their wealth through smarter technology. The service offers a globally diversified portfolio of ETFs, designed to help provide ...


Wall Street Journal (blog)

The Top 10 US States Where Chinese Are Investing in Real Estate
Wall Street Journal (blog)
Big institutional Chinese investors who want global real-estate portfolios typically look for trophy projects in cities like New York, Los Angeles and London. Just this month, Hilton Worldwide agreed to sell its flagship Waldorf Astoria hotel in New ...


USA TODAY

Investing: Can you retire on $1 million?
USA TODAY
If you read any financial advertising, you know that your savings are inadequate, and you're likely to freeze to death in the dark a few weeks after retirement. For this reason, most Americans' retirement planning involves keeling over at their desks ...

and more »

Resource Investor

Silver Buyers "Not Investing, But Stacking"
BullionVault
On "current trends", says the new Silver Investment Demand report from US consultancy the CPM Group – commissioned by the Washington-based Silver Institute – investors worldwide could grow their aggregate holdings by 50% between now and 2024.
Investors May Accumulate 1 Billion Ounces of Silver in Next DecadeSilver Investing News

all 16 news articles »

MarketWatch

Fighting Ebola though investing: one firm's approach
MarketWatch
SAN FRANCISCO (MarketWatch) — A month ago, few people would have thought of investing in companies that specifically made products for fighting the spread of the deadly Ebola virus. Now, one idea-oriented online broker has put together an investment ...

and more »
Google News

Eight Questions to Ask Your Financial Advisor

You may like your financial advisor, but is he really... Read More

The Real Cost of a Bad Habit

What is the value of a good habit? Think of... Read More

Do You Need A Financial Planner?

No matter how much money you make, it pays to... Read More

Investing 101: Risk Terminology - BETA

About thirty years ago, statisticians armed with all of their... Read More

Learn How to Lose and Risk Management

One of the leading traders on Chicago Mercantile Exchange, because... Read More

Trend Following

Trend following also called momentum trading is the simplest and... Read More

It?s Not the Size of Your Bank Account

You might think that if you win the lottery or... Read More

Better Investing Made Easy

If there were one piece of advice that an investor... Read More

Is a SEP Plan Right For Your Business

A SEP is a special type of IRA. Under a... Read More

Use of a Franchise Business as a Family Tax Planning Strategy

Suggesting the use of a franchise business as a vehicle... Read More

Keeping It Interesting

Some lines from a movie never leave your mind; I... Read More

The Differences Betweeen the Wealthy and Everyone Else

I recently received an e-mail from a young lady who... Read More

Poll Names Coin Laundries Best Investment For 2005

According to Morton Pollack, CEO of PWS, The Laundry Company... Read More

Day Traders and Swing Traders and Options? Maybe!

Typical day traders and swing traders look for stocks with... Read More

The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs

Online trading is so seductive - just sit, click, and... Read More

Why Should I Use Penny Shares to Build Wealth?

A strategic question. Why indeed?1. A penny share would usually... Read More

Lessons in Transition

Q: What have been the most successful approaches to attracting... Read More

Trading Tips No 4: Technical Analysis The Holy Grail Syndrome

Everyone knows that the Holy Grail of investing and trading... Read More

Success Trading for New Traders: What Does Bid and Ask Mean?

Do you ever wonder exactly what's going on in the... Read More

Critical Options Investing Tip When Trading Naked Calls and Puts

An option is a derivative trading product that is best... Read More

Investing and Asset Allocation

Sometimes you spend sleepless nights worrying about which stocks to... Read More

Before You Invest You Must Read This

It is important to answer the following questions before you... Read More

Why You Need To Buy and Sell Gold Coins (Part 2)

How to Collect Rare Coins For Fun and ProfitTime has... Read More

An Investment Real Estate Strategy Unknown To Most Is A Negative Amortization Loan

If you want to make the most of your personal... Read More

It Is Never Too Early To Start A Roth IRA!

The Roth is kind of weird until you get used... Read More