Rachel Haig: I'm Rachel Haig for Morningstar.com. This year, unlike last year, some investors are actually seeing some gains in their portfolios. Here with me to discuss portfolio strategies for handling these as taxes come up is Morningstar's director of personal finance, Christine Benz. Thanks for joining me again, Christine.
Christine Benz: Hi Rachel. Nice to be here.
Haig: So what are things that people should keep in mind, with either gains or losses, as they plan for taxes?
Benz: This has been a good year for most investors. It's really a rare investment that doesn't have a gain for the year to date. The good news is that if investors are inclined to sell something in which they have a gain, they probably have a loss elsewhere in their portfolio that they can use to offset that gain. So, before you do any selling, I would comb through your portfolio to see if you can take any losses.Read Full Transcript
Another thing to keep in mind is, when you have the kind of gains like we've seen in a lot of mutual funds this year, sometimes what you start to see is funds dishing out big capital gains to their shareholders, because they are required to do so by law if they have capital gains on their books.
And the good news is that I don't expect to see big capital-gains distributions from most funds for this year, mainly because most funds did have big tax-loss carry-forwards on their books that they were able to use to offset gains.
So, if there are capital gains paid out, I would guess that they wouldn't be particularly large or particularly widespread. So that's a plus.
Haig: So, for someone trying to balance their gains by taking some losses, how should someone decide if it's worth taking a loss on a stock for the tax benefits?
Benz: Or a fund. I think the key thing you want to think about is the investment merit. So, don't sell strictly for the sake of taking the tax loss, but only sell something that you were inclined to sell anyway due to investment considerations and maybe the tax situation lines up for you as well. I think the last thing you want to do is managing your portfolio strictly because it's advantageous for you from a tax standpoint but maybe not necessarily from an investment standpoint.
Haig: Also in terms of strategy, portfolio-wise, to help minimize taxes, it seems like there are some changes coming up with dividends and capital gains in 2011. What are some things investors need to think about now to prepare for that?
Benz: Yeah, it's a great point. All is quiet on the tax front in 2010. Not a lot of changes. So what we'll see is capital gains for most investors at 15%, and dividend income, also, at that 15% tax rate. Those are really low tax rates relative to historical norms. In 2011, it's widely believed that those tax rates will sunset and actually revert back to what they were about six or seven years ago. So that would be 20% capital-gains rate for most investors, and ordinary income-tax rate on income--on bond income, for example.
So, there again, the rate changes aren't large enough, certainly, the capital-gains tax rates aren't large enough to merit a big re-jiggering based on tax considerations alone. But certainly, if you have something in which you have a big gain in your portfolio, and you were inclined to sell it anyway, you're certainly better doing it within the next year than waiting until 2011 or beyond, when there is a lot more uncertainty, and certainly the potential for capital-gains rates to go higher.
Haig: Well, thanks again for joining me.
Benz: Thanks, Rachel.
Haig: For Morningstar.com, I'm Rachel Haig. Thanks for watching.