TAXATION IN A BEAR MARKET
Global stock markets marked the beginning of 2016 on a negative note, with Dow Jones Industrial Average and the S&P 500 Index wiping out more than 5% this year. Some analysts and investors believe the downfall will continue. Here are some tax tips to protect investments in a bear market.
Convert Roth IRAs. Slumping stock market? Grab the opportunity to change a portion or all of a conventional IRA account to a Roth IRA. The amount in the account is taxable but can be lowered.
Exercise employee stock options. When exercised, the difference between the price of the grant and the non-qualified employee stock option is subject to taxes. If the market declines, the tax drops as well. If the shares are retained upon exercising the options, appreciations are taxable at discounted long-term capital gains rates provided the stocks are held for at least one year after it is exercised.
Go with restricted stock units. Several companies award RSUs to certain employees in lieu of stock options. This investment renders value if the stock price is greater than zero, but it becomes taxable when vesting. If an employee opts to maintain his own company shares, the gains incur a preferential long-term capital gains tax rate if the stocks are maintained for at least one year and one day. Should employees sell their shares and reinvest the earnings somewhere else, they will be purchasing low since the likelihood of long-term capital gains and increment dwindle.
Recharacterize Roth conversions. An individual has until October 17 to undo a Roth conversion which was done last year. Doing so at a later time would result in a reduced tax cost. Taxpayers need to wait about 30 days to reconvert any assets from a previous conversion. No waiting period is warranted for changing from traditional IRAs to a Roth IRA.
Use tax-loss harvesting. Losses generated for the current year can be utilized to offset any capital gains reaped for that year or beyond. An individual can subtract up to $3,000 of the losses on a return. Also, untouched capital losses can offset future gains. When using this technique, always remember the wash-sale rule.
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