9 Easy Ways to Reduce Your Tax Bill Series - Tax Tip #5

Over the next weeks we are going to provide you 9 easy ways to reduce your tax liability - 2016 Edition. Every Monday and Wednesday we will be posting a new tip, so stay tuned!

Tax Tip #5

For those people with capital gains from sales of stock or from mutual fund distributions, many know that they can offset those gains with a loss, but few actually sit down and do the annual exercise. It is a good idea to meet with a financial advisor or broker to look at your losses. By selling those losing assets, you can offset your other investment gains and end up with an equivalent of no capital gains. Many people would rather not sell their underperforming assets, because they believe they’re about to "come back" and wouldn’t dare wait the 31-day waiting period to repurchase the same asset as an allowable purchase.

However, many people don’t realize that an ETF (Exchanged Traded Fund) is in a different asset class than a mutual fund, and many ETFs are comprised of many of the same assets as their mutual fund counterparts. For instance, someone invested in the Vanguard S&P 500 mutual fund could sell that fund at a loss and buy the Vanguard S&P 500 ETF the next day without violating the 31-day rule. There are other nuances to changing asset classes that must be considered, but the point is clear: in December, compare your investment winners and losers and plan accordingly.