<FOOLISH WORKSHOP>

Put the Tax Man on Hold

by Jim Stevens ([email protected])

Burlington, VT (November 30, 1998) -- Over my tenure as a Workshop guest and contributor, I've noticed that year end is about the most popular time to either begin investing in a Foolish portfolio of stocks or to reallocate a growing nest egg. I can think of plenty of reasons why this is the case for many a Fool. Year-end bonuses, the fabled "January Effect," New Year's resolutions, easy future comparisons to indexes year-to-date, and -- one I like -- straddling the end of the tax year with profit vs. loss trades.

If you invest in stocks in a taxable account and plan on holding them for a year, you may be able to delay the IRS bite by using this technique. Let me start out by saying I'm no tax expert -- I get my accountant neighbor's help with all my tax stuff. Everyone's situation is different, so consult your own advisor. My advice carries zero weight with the Feds, so telling them "Jim said it was OK" will only serve to get them looking at my return!

Since holding assets for one year reduces the Federal tax rate to a maximum 20%, it's a common holding period. On the 366th day (or more) after buying stocks, you can sell them and get the lower tax rate on any gains. On the other hand, if you've incurred a loss on a position, then no matter when you sell it you can subtract the losses from the current tax years' short-term gains and/or income.

If you started a portfolio in early January, it often makes sense to close out losing positions in December so losses can be subtracted from taxable gains and income in the current year. This is true even though the losing position is less than a year old. The winning positions to be sold are then traded in January and get accounted for under the new year's taxable gains, at the lower rate.

While these taxes are technically due at the time of year the gains were realized, they can be paid over the entire year through income withholding as long as you stay within withholding guidelines. At the end of the year, dare I say, you may also have some new losses that would again reduce that year's tax bill. In summary: Losses (net money from IRS to Taxpayer) -- the benefit is realized immediately and at the full rate. Gains (net money from Taxpayer to IRS) -- the taxes are delayed and paid at a discounted rate.

No doubt there are some big gun trade-for-a-living types out there who are snickering at this small potatoes tactic. It can work reasonably well for people who get the bulk of their taxes withheld from wages, but it's a nonstarter if your investment gains generate most or all of your tax liability.

I realize I've dived into the muddy waters of taxes here, friends. I know there are volumes of exceptions, details, special circumstances, yada, yada, yada that I have unquestionably glossed over, didn't mention, or don't even know about. There is a lot more to it than my simplistic explanation. Remember, again, this is simply a "works for me" hint from a decidedly non-professional tax unenthusiast.

Have a great week.

Bonus! Dozens Update

Because of the shortened Friday, we weren't able to go over the latest Dozens updates, so let's do so now. First, let's take a look at the returns as of this morning (Monday, November 30):

Keystone Dozens     29.43%
Formula 90 Dozens   13.49%
Relative Strength   18.23%
Low PSR             -2.10%

Each of these is versus a Standard & Poor's 500 Index up about 11%. Just so everyone knows, the Dozens approach is one where you buy a new stock, adding a little money at a time. So when I write that the S&P 500 is up only 11%, that's based on adding a little money throughout the year, not all at the beginning.

We also started a Spark 5 Dozens port a few months back. It only has two stocks so far, Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> and Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %>. The Spark 5 Dozens port is -5.19% versus an S&P 500 up 9.89%. We'll see how this develops as time goes on and more positions are added to the mock portfolio.

Speaking of adding positions to our mock portfolios, let's do that now. Here are this month's new positions based on Friday's close and the rankings generated from Friday's Workshop database:

Spark 5 -- add 10 shares of Nokia Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %> at $100.25
Keystone -- add 9 shares of Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> at $110
Formula 90 -- add 12 shares of Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> at $80.38
RS - 26wk -- add 13 shares of Biogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGEN)") else Response.Write("(Nasdaq: BGEN)") end if %> at $78.25
Low PSR -- add 35 shares of Eagle Hardware <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EAGL)") else Response.Write("(Nasdaq: EAGL)") end if %> at $28 11/16

[Note -- Eagle Hardware is being acquired by Lowe's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %>, so any shares bought in Eagle Hardware will have to be converted into Lowe's shares. It's an all stock deal.]

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database