FOX Translator
No data currently available.
No data currently available.
TITLE
Durable goods are just that: hard goods; they don't wear out quickly and can be used over and over again for at least several years. Think your car, TV, refrigerator or computer. These are certainly not disposable, one-time use items.
The opposite of a hard good is (surprise!) a soft good or, if you like, a non-durable good. These are products you use once, like your lunch at McDonald's, the gas in your car and the ugly sweater your grandmother bought you for your birthday. These items have an intended lifespan short of three years, or are consumed immediately.
Investors pay attention to the monthly durable orders report released by the Commerce Department around the end of each month. When durable goods are strong, it means that U.S. manufacturing is humming along, though economists tend to parse the numbers pretty closely. Big-ticket items can skew the overall results, since an order for, say, 75 Boeing 747s has a bigger impact than 75 iPods. Luckily, the data lets economists break down the sectors.
Home / Personal Finance / Financial Planning / Tax
Monday, March 10, 2008
Three Strategies to Help Reduce the Capital Gains Tax
Kathryn Elizabeth Tuggle
FOXBusiness
Taxes are On Topic in March at FOXBusiness.com. From tips on how to save money when you file to how to avoid an audit, check back throughout the month to find out what you need to know.
There are strategies, however, for reducing these taxes, which are paid on profits generated by investments, usually from sales of stocks and bonds or real estate. Nico R. Willis, president & CEO of NetWorth Capital Services, and Kaye Thomas, author of Capital Gains, Minimal Taxes, offer three ways to reduce capital gains.
No. 1: Specific Method
Under
one strategy, coined the Specific Method or Specific ID, shareholders specify or “identify” which stocks they would like to
sell and when they would like to sell them, according to Willis.
"Let's say I bought 100 shares of Company A at
$10 a share. Then, later that year I bought 100 shares at $20 per share, and then made a third purchase of 100 shares at $30
each," he said. "The next year, the stock price went up to $50, so I decided to sell some of my shares, but not all of them."
With the Specific Method, a seller can choose to sell his or her shares as if they were all purchased at the $30 level, so
as to reduce capital gains, according to Willis. "Otherwise, shares are sold by a method called "FIFO," which stands for "first
in, first out," he said.
"With FiFo, the shares I bought at the $10 level would be the first ones I sold, and my capital
gains would be huge," he said. That's because those $10 shares have risen the most and therefore generated the largest profits.
Likening the process to inventory at a supermarket, he explained: "If you go into the supermarket and look at milk,
you'd notice that the oldest is on the front. With securities, your first purchase is in the oldest position, and will therefore
be the first sold. But with Specific Method, you can say, 'No, wait, I want to sell first what I bought last [at the $30 level].
Choosing [to sell] the securities at the highest cost basis will produce the lowest capital gains."
Specific Method
is only applicable when selling stock purchased at different times but issued by the same company. Willis added that investors
commonly use the Specific Method to identify which stocks they can sell to produce the lowest "tax bite." The strategy is
often used to liquidate assets while still reducing the amount you are taxed.
According to Thomas, the only way in
which Specific ID can “backfire" is if the seller hasn't owned the stocks for over a year. "You have to hold these stocks
long term--for long-term capital gains--in order for Specific ID to work. If you try and sell them before a year is up, you
will be taxed at a higher rate for everything, defeating the strategy.”
Capital gains are divided into two categories:
short and long term. Short term is when a stock is held for a year or less, and long term capital gains are held for longer
than a year. Short term gains are taxed at the investor's current income tax level, and long term gains at 15%, according
to Thomas.
No. 2: Offset Gains Against Past
Losses
The second strategy is offsetting future gains with losses taken in a previous
year, according to Willis. A stockholder can carry over losses in their portfolio indefinitely to offset any gains they may
incur during the following tax year.
“Say you had losses last year and you or your tax preparer carries over those
losses, this is a great opportunity to offset any gains you want to make in the next year," he said. Gains can be offset dollar-for-
dollar by losses, and a maximum of $3,000 in losses can be carried over each year. Willis cautioned against forgetting about
losses. "People might say, 'Oh, I took a hit on the stock market five years ago,' but you can still carry those over. Even
if you took a $20,000 hit you can carry those over indefinitely, and just break that big loss down into $3,000 increments,"
Willis said.
Capital losses are great to "harvest," according to Thomas. "When you do have capital losses, it's a great
idea to pocket those so that they are there and available to be used when you do have gains. The misconception that many people
have is that you have done something wrong if you are carrying over capital losses, or that you are somehow better off if
you have less than $3,000 in capital losses, but that’s an advantage,” Thomas said. “It could turn out to be very valuable
in a future year when you have a capital gain.”
No. 3: Time
Because
long-term capital gains are taxed at only 15%, the most common strategy traders employ for reducing taxes is holding onto
their best performing stocks, according to Willis. "Even though day trading may have been a very popular strategy during the
peak of the tech boom in the early 90s, investors that have longer term horizons know that holding onto an investment as long
as possible will reduce taxes and give more options with regard to tax planning, estate planning, and gifting," he said.
According
to Thomas, time is the most important part of a big picture investor's strategy. "The number one thing you want to do is to
defer your capital gains, defer them as long as possible," he said. "The single most effective thing people can do to reduce
capital gains over the long haul is just don't sell the winners. That may seem too simple, but if you can possibly do that
within your strategy, do it."
Holding onto stocks for a longer period of time also avoids transaction costs, commission
costs, and the bid/ask spread, according to Thomas.
Market Snapshot
| Symbol | Last Price | Netchange | Volume |
|---|---|---|---|
| -- | -- | -- | -- |
| -- | -- | -- | -- |
| -- | -- | -- | -- |
| -- | -- | -- | -- |
| -- | -- | -- | -- |
