Prepare Now to Avoid Yearend Tax Problems

Who should be worrying about capital gains taxes when selling stock in a market that has been tough? You should, that’s who.

With the end of the year coming faster than you can say: “bailout,” stock investors should take a hard look at their holdings and potential tax bombs that may be lurking.

A quick review of taxes on investments. If you sell a stock or most any other security before you have held it one calendar year, you pay regular income tax rates on the profit.

If you hold a stock or security for at least one full year before you sell, any profit is taxed at long-term capital gains rates (for tax year 2009, the top rate you may pay is 15 percent).

Tax Warning

NOTE: These are the broadest of tax guidelines and may not apply to every situation or taxpayer. Always consult a competent tax adviser before making any decision with tax consequences.

There are several circumstances where you face potential tax liabilities:

• You sell a stock that although down for the year, still represents a profit
• You jump on market volatility and grab a quick profit
• You are at or near retirement and need to convert investments to cash
• You sell stocks and buy bonds or other income securities

In each of these cases (and possibly other circumstances), you may owe taxes either short or long-term gains.

If you have already committed one or more taxable transactions, you still have an option to offset any potential tax liability.

You can sell a security at a loss and possibly offset some of your potential tax liability.

Tax Laws Complicated

Tax laws are complicated and may not be a simple as my illustrations suggest. Many factors must be considered. Don’t attempt this strategy without checking with tax counsel.

If you get the go-ahead from your tax planner, look for stocks or qualifying securities that may have a difficult time recovering, even in a robust market.

Don’t let yearend catch you unprepared for tax consequences.