H&R Block: Buy low and sell high not enough for investors

Any investment strategy that does not include tax planning is missing part of the larger financial picture. While taxpayers should not make investment decisions for tax purposes alone, they should consider the implications certain investment decisions and outcomes will mean for their taxes and even consider a few options to reduce their tax liability.

Plan at least over two years
A financial decision that results in a tax benefit in 2014 may have unexpected consequences in 2015. For example, a taxpayer might increase charitable contributions in 2014 to get a tax benefit, but decrease charitable contributions in 2015. That might not be the best move if the taxpayer expects to see their taxes stay the same or increase in 2015; for example, perhaps the taxpayer expects to lose a dependent and see their tax liability increase. The timing of buying and selling stocks could similarly affect a taxpayer across multiple years, so taxpayers should look ahead before making investment decisions.

Offset capital gains with capital losses
Those with a large net capital gain could reduce their tax liability by selling stock if it would generate a loss. The amount of their loss would offset their gain and reduce the amount that is taxed. Taxpayers in this situation should consult both their investment advisor to look at the larger financial picture and their tax professional to run the numbers and estimate their taxes before the end of the year.

Increase basis with home improvements
The tax code excludes the first $250,000 of gain from selling a house from tax if the homeowner meets the ownership and use requirements. For married taxpayers filing jointly, the exclusion increases to $500,000 if the requirements are met. But upgrades to the house – like installing new heating and cooling, upgrading a roof or windows, renovating a kitchen or adding a room – add to the basis in the house, and thereby decrease gain on the sale. This is especially helpful for those who do not qualify for the exclusion, or for situations when a homeowner’s gain exceeds the allowable exclusion amount.

Repair and maintenance costs necessary to keep the home in good condition, such as painting the home, do not count as upgrades increasing a homeowner’s basis. To qualify, an upgrade will add value to the home, prolong its useful life or adapt it to new uses.

Considering future tax implications will enable investors to make better investment decisions based on a bigger financial picture across multiple years. Just as they may consult an investment advisor for help understanding their investment options, they may also choose to work with a tax professional for help completing the financial and tax picture.

[Gina Smith is a Client Service Leader for H&R Block, the world’s largest tax services provider. Gina has been providing expert tax advice and preparation support for taxpayers in Atlanta since 2008.]

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