Investors Be Aware: Tax Planning Time Is Here This Year's Large Run-Up in Stock Prices Means Shareholders Need to Look More Closely at Capital-Gains and Other Taxes

By Guy Halverson, writer of The Christian Science Monitor | The Christian Science Monitor, November 14, 1995 | Go to article overview

Investors Be Aware: Tax Planning Time Is Here This Year's Large Run-Up in Stock Prices Means Shareholders Need to Look More Closely at Capital-Gains and Other Taxes


Guy Halverson, writer of The Christian Science Monitor, The Christian Science Monitor


IT'S fall, pumpkins are out, Thanksgiving is just around the corner, and the stock market is still hitting high terrains. That means it's time to get serious about - taxes.

For thousands of investors, the large run-up in stock prices during 1995 makes tax planning "more important than usual," says Elda Di Re, a partner with the accounting firm Ernst & Young LLP.

For example, if you are now contemplating buying into a new mutual fund that has racked up substantial gains this year, "you might want to wait" until after the fund formally records a distribution of dividends to account holders during the next few weeks, Ms. Di Re says.

The reason: If you buy a fund now, and it pays a capital gain, you are in effect "buying that dividend," just as though you had held the fund all year. Instead, check with the mutual-fund company and ask when the dividend will be declared. Wait until the next day to buy.

Persons who hold individual stocks that have posted especially impressive price gains might need to consider several tax alternatives, says Mark Luscombe, an attorney and principal tax analyst with CCH Inc. in Riverwoods, Ill. CCH is a provider of tax information and software.

Congress is currently considering retroactively lowering the capital-gains rate, which is now 28 percent and applies to securities held longer than one year. If you have an individual stock that has done very well and you want to lock in the price gain, you face a choice. You could sell now, Mr. Luscombe says. If Congress lowers the capital-gains rate and makes it retroactive to 1995, you come out ahead, with a lower rate. Or you could wait until next year to sell, hoping Congress lowers the rate.

But what if the market dips? There goes your price gain. According to Luscombe, you have another alternative. You could "sell short against the box." That lingo means you defer the tax consequence for a year. Here's how: You sell "short" an equal number of the same shares that you now own. The sale is set for a specified future date, sometime in 1996, and the sales price is ensured - such as at the current market price of the stock. At the future time in 1996, you deliver the shares. Thus, the trade is considered to have occurred in 1996, not 1995. You have locked in your price gain, but deferred the tax until next year. The tax bill will not come due until April 15, 1997.

If you are selling off some securities from multiple lots purchased over time - that is, for example, from groups of 100 shares or more - have your broker or mutual fund sell the shares from among your most recent purchases. …

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