December Investment Tax Tips


It’s December and a good time for investors to review a few important tax tips.

Wash Sale rule

The  “wash sale rule” exists to discourage investors from taking losses on a stock (or other security) without divesting themselves of that stock.  If an investor sells stock at a loss and, within 30 days before or after the sale, directly or indirectly buys substantially identical stock or securities then the loss from the sale is not deductible, the cost basis of the newly acquired stock or securities is increased by the amount of the disallowed loss, and the holding period of the new stock includes that of the stock sold.  The investor ends up right where he started with less money in his pocket because of the trading costs.

For example, if you had losses in your shares of ABC stock, sold them, and bought them back within 30 days, you would be violating the wash sale rule.  If you sell shares of a mutual fund at a loss and buy shares of another mutual fund that invests in identical stocks, you would also be violating the rule.  But if you bought shares in a similar but not identical fund, you would be okay.

Capital Gains Distributions

Many mutual funds distribute dividends and capital gains in the final months of the year.  On the day the dividend and capital gain distribution is declared, the fund price will decrease by the amount of the distribution.  If you have elected a reinvestment option, the distribution will buy more shares, and the market value of your account will stay the same.  If you take the distribution in cash, the market value will decrease by the amount of the distribution.  But in either case -- whether the distributions are reinvested or distributed – you must report them on your tax return.

If you are thinking about buying a mutual fund before the end of the year, call the fund company and find out if they are forecasting taxable distributions.  Include this information in your decision-making process. Don’t let taxes alone stop you from making your purchase. You could be worse off if you miss out on a year-end rally in the fund’s share price. 

Net Investment Income Tax (NIIT) 

This new federal tax went into effect on January 1, 2013. The NIIT is a 3.8% surtax on interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to you.

For married individuals the tax applies if you have NIIT and if your modified adjusted gross income exceeds $250,000.  For single filers, the threshold is $200,000.  Estates and trusts are subject to the NIIT if they have undistributed net investment income and are in the highest tax bracket, which is 39.6% and kicks in when the entity’s adjusted gross income exceeds $12,150 in 2014.

The NIIT surtax only applies to the net investment income, which is your gross investment income less any related expenses.  Related expenses you can subtract from your gross investment income include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in Net Investment Income.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to