Save and Conquer

I previously wrote about selling equities at a loss in our taxable brokerage account this year to reduce our taxable income by $3000. There are a couple of additional timing issues for selling and buying equities at year end to be concerned with.

It is generally advisable to sell before a fund or equity pays dividends. It will typically be a wash between capital gains and dividend gains if you are selling with a gain in your holdings, but if you are selling at a loss, you would end up having your tax loss having to be used to offset the dividend gain. Usually, your fund or stock will decrease in value to match the dividend payment, so some people say it is a wash, but why add the extra complexity of a dividend payment that you will offset with the planned loss. Also, some of your dividend could be classed as non-qualified, such as those paid in a REIT, in which case, you cannot offset them with a loss.

Another timing issue, is that you do not want to purchase a fund or stock just before it pays its dividend. You should wait to purchase until after the dividend payment date. Otherwise you will have to pay taxes on a distribution that does nothing for you.

I am not advocating selling before dividend payments and buying back afterward. This does nothing for you since it resets your cost basis at the time you purchase, and you will owe capital gain taxes or have a capital gain loss at the time of sale. It may not hurt you, but it will not help your taxes.

The thing I am talking about is if you were planning to sell an equity anyway, perhaps to rebalance your asset allocation, it is good to sell before the dividend payment date, and if you are planning to buy an equity, it is good to buy after the dividend payment date. (And when I say equity, I also mean mutual fund as well as ETF.)

Stumble it!