Published January 23, 2014
Last year was a great year for equity investors, but as you count your gains, remember that last year's prosperity can be this year's tax problem. All those gains may have turned your portfolio into a ticking tax time-bomb.
The S&P 500 was up nearly 30% in 2013. Any U.S. stock portfolio should be looking much fatter as a result, but keep in mind that if your portfolio is taxable, you will have to give some of that increase back in the form of realized gains taxes. What's more to the point, the real tax liability may be waiting to hit you in the 2014 tax year.
The dangers of unrealized gains
While you may have racked up around 30% worth of paper gains in 2013, unless your portfolio is managed in a high-turnover approach, chances are that much of that increase is in the form of unrealized gains. If you have not done so already, you should tally up your realized gains from last year, just so you will have a feel for what kind of tax bill you will be looking at this April.
More importantly for planning purposes, you should also look at the magnitude of unrealized gains in your portfolio. Since investment gains are only taxed when you sell a security, the large unrealized gains that can build up when a portfolio has a strong year can become a problem in future years. For example, your portfolio might only break even in 2014, but if you sell any stocks that were up big in 2013, you may face a tax liability for this year that exceeds your investment return.
How can you defuse this ticking time-bomb? The truth is, you cannot expect gains without paying some taxes, but there are ways you can manage the impact of a large build-up in unrealized gains. Here are five suggestions:
Always remember, taxes on gains are a sign of a healthy portfolio. In other words, it's a good problem to have.
The original article can be found at Money-Rates.com:
Is your portfolio a tax time-bomb?