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Minimizing tax burdens extends to various asset classes and sources of income. This includes your investment portfolio when deciding to sell shares of stocks, bonds or mutual funds.
As tax season approaches, many investors sell investments for cash to meet other taxable liabilities. Some may intend to reinvest and rebalance their portfolios, or a slew of other reasons.
The specific identification method can reduce the cost basis of your investment sales and lower tax liability.
How It Works:
When you sell investments, the IRS assumes shares that were bought first are being sold. This is otherwise known as FIFO. (First In First Out).
If older shares of your stock mutual fund were purchased at lower prices than other shares, you will realize a larger taxable gain.
Investment Managers such as Elliott Broidy factor in the implications of cost basis when making buy and sell decision for their clients. However, this same approach is readily available to individual investors.
By identifying the specific shares that are being sold by purchase date, you can reduce this tax liability.
Making Specific Identification Easier:
The Specific Identification Method is facilitated by organization and planning.
For those who manage their own portfolio, personal finance software helps sort through investment history to identify shares with favorable cost basis.
Many online brokerages enable you to specify the shares that are being sold. This is typically in a special instructions tab.
Otherwise, you may place trades over the phone using the specific identification of shares.
An Aspect of Overall Tax Strategy:
Tax consequences are a crucial consideration for selecting, managing and selling investments.
While the reasons for selling investments will vary, specific identification may be a viable option to reduce your tax liability.
In understanding the various tax strategies available for their unique situation, investors can make more informed decisions.
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