Increasing Your Return on Life.®

Frank Talk - 4th Quarter Newsletter (2018)

Published: 12/22/2018

Table of Contents


Written by: Frank Fantozzi

Happy Holidays, Clients and Friends!

Where does the time go? I seem to be asking myself that question more and more frequently these days—every time I think of my daughters—now grown and embarking on lives of their own; each time Paulette and I celebrate another wedding anniversary; each December when I turn yet another year older; and each time our firm reaches another milestone. And in 2019—Planned Financial Services will hit a big one! Next year will mark our 25th anniversary helping families and businesses like yours pursue their desired Return on Life®, and nothing could be more rewarding for the experienced team we continue to build and grow. In fact, we recently welcomed two new team members, Client Liaison and Compliance Specialist, Ashley Benton-Cooper, and Wealth Advisor, Amy Valentine. You can read more about Ashley and Amy below under “News.”

Another newsworthy item I want to direct your attention to is our recent certification from the Centre for Fiduciary Excellence, LLC (CEFEX). As noted below, this is a hallmark accomplishment for 401(k) Prosperity® since certification is only granted by CEFEX to firms that demonstrate adherence to fiduciary best practices.

Finally, be sure to read our Market & Economic Update to learn more about our thoughts on trade and the financial markets.

What’s in It for You?

At-a-glance guide to your 4th Quarter 2018 Frank Talk newsletter:

  • News
    • 401(k) Prosperity® Earns CEFEX Fiduciary Excellence Certification
    • Frank Fantozzi chosen as a 2018 Medical Mutual Pillar Award for Community Service Honoree
    • PFS Awarded Weatherhead 100 for 7th Time
    • PFS Welcomes Two New Team Member
  • Events
    • Smart Business Northeast Ohio Family Business Conference Recap
  • Market & Economic Update


401(k) Prosperity® Earns CEFEX Fiduciary Excellence Certification

CEFEX_tm_logo_med(617x233)(340x128)401(k) Prosperity®, the retirement plan division of Planned Financial Services is honored to announce our certification from the Centre for Fiduciary Excellence, LLC (CEFEX). This certification is only granted by CEFEX to firms that demonstrate adherence to fiduciary best practices. It is a hallmark accomplishment for 401(k) Prosperity® as it signifies conformity to a recognized global standard of fiduciary excellence.

401(k) Prosperity® was subject to a rigorous, multi-month audit and certification process guided by the “Prudent Practices® for Investment Advisors”, an industry-recognized handbook that is grounded in law, regulation and professional best practices. Use of the CEFEX Mark indicates that a firm’s established practices are aligned with investors’ interests and worthy of trust and confidence.

401(k) Prosperity® is certified for retirement plan services including 401(k)/profit sharing and cash balance plans as an Investment Advisor Representative within the LPL RPCP program. 401(k) Prosperity’s certification is registered and can be viewed at CEFEX certification standards are substantiated by legislation, case law and regulatory opinion letters from the Employee Retirement Income Security Act (ERISA), the Investment Advisers Act of 1940, the Uniform Prudent Investor Act (UPIA), the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and the Uniform Management of Public Employee Retirement Systems Act (UMPERSA) in the U.S.  A full copy of the standard can be downloaded from CEFEX at and a summary can be viewed by clicking on 401(k) Prosperity’s online CEFEX certificate. 

Frank Fantozzi Honored as Nonprofit Board Executive of the Year

Frank Fantozzi was chosen as a Medical Mutual Northeast Ohio 2018 Pillar Award for Community Service honoree in the category: Our Lady of the Wayside Nonprofit Board Executives of the Year Award, based on his work as a board member and Co-Chair of the Fundraising Committee for Northeast Ohio’s not-for-profit, LifeAct®.  The Our Lady of the Wayside Nonprofit Board Executives of the Year Award honors contributions by for-profit business executives who serve on nonprofit boards. Seventy nominations were received for the Medical Mutual Northeast Ohio 2018 Pillar Award for Community Service; 20 honorees were selected overall, with 4 honorees chosen in the Our Lady of the Wayside Nonprofit Board Executives of the Year Award category.

LifeAct’s mission is to prevent suicide by teaching young people to recognize the warning signs of depression and suicidal behavior by providing students in schools throughout Northeast Ohio with the tools and resources required to get the professional help that they need and seek for themselves and others. Frank has played an integral role in developing and implementing the organization’s formal growth strategy which is focused on identifying new donor channels and donor types and leveraging existing donors.

Frank was formally honored at the Pillar Awards Ceremony the evening of December 6, 2018 at the LaCentre Conference & Banquet Facility in Westlake, Ohio. Planned Financial Services, Medical Mutual and LifeAct® are separate entities.

PFS Awarded Weatherhead 100 for 7th Time

Planned Financial Services was named a Weatherhead 100 Upstart company for the seventh time by the Weatherhead School of Management, Case Western Reserve University. Established in 1988, The Weatherhead 100 awards are the premier celebration of Northeast Ohio’s spirit of entrepreneurship and the companies leading the way in Northeast Ohio. Each year, the organization recognizes an elite group of companies who are the best example of leadership, growth and success in our region. Companies that make the list are recognized for their percent of revenue growth over the past five years.  PFS was honored among its peers at a special black-tie event marking the 31st Annual Weatherhead 100 awards ceremony on November 29th at the Hilton Cleveland Downtown.

The Weatherhead 100, awarded to PFS in 2007, 2008, 2009, 2011, 2016, 2017 and 2018, is based on sales growth, employment of 15 or fewer employees, and/or companies with less than $1 million in net sales. Planned Financial Services and Weatherhead School of Management, Case Western Reserve University are separate entities.

PFS Welcomes Two New Team Members

Ashley Benton-Cooper Joins PFS Team as Client Liaison and Compliance Specialist

Ashley joined your Planned Financial Services team in September as a client liaison and compliance specialist, bringing  a keen understanding of the unique challenges affluent families and business owners face as they seek to protect and grow their wealth. Ashley earned  her Bachelor of Science in Accounting (BSA) and Bachelor of Business Administration (BBA) in Finance from the University of Akron in Akron, Ohio. She holds her Life, Health and Variable Annuity Insurance licenses and is long-term care certified.

Wealth Advisor, Amy Valentine, CFA®, Joins the PFS Team

Planned Financial Services welcomed Amy Valentine to the team in November. Amy is a CFA® charterholder and a Wealth Advisor with more than 14 years of experience in financial planning, portfolio management, manager due-diligence, investment research, and financial analysis. Prior to joining Planned Financial Services, Amy served the needs of a broad range of clients at financial institutions, including Ameriprise Financial, Charles Schwab Investment Management, and Citibank, as well as the family office for the Ratner, Miller and Shafran families.  Amy earned a Master of Business Administration with a concentration in banking & finance from Case Western Reserve University in Cleveland, Ohio, and a bachelor’s degree in Economics from National Taiwan University. Amy served as a board member for the CFA Society of Cleveland from 2010 to 2011.

Visit Planned Financial Services/Your Team to learn more about the many ways your PFS team can help you pursue the Return on Life® you desire.


Smart Business: Family Business Conference and Achievement Awards Recap

SBFBPFS once again participated as a sponsor of the Smart Business: Family Business Conference and Family Business Achievement Awards on Thursday, September 6, 2018. The interactive workshop and awards program, presented by Cuyahoga Community College, featured a dynamic line-up of keynote speakers and panelists, including Frank Fantozzi,  who shared real life examples of what separates family business success stories from failures. Attendees gained perspectives from both industry experts and participating family business owners to address the real issues facing family-owned businesses every day.   

The panel discussed a variety of steps family-owned businesses can take to overcome challenges to business longevity to ensure the ongoing viability of the business and preserve stakeholder value across multiple generations. Below is a summary of key take-aways and considerations from the panel discussion that when properly implemented, can help family-owned businesses build strong, thriving businesses that meet the test of time.  One of the greatest challenges that family-owned businesses continue to face is that only about 30% of businesses survive second-generation ownership while only 12% make it to the 3rd generation and only about 3% make it to the 4th generation, according to the Family Business Institute. A lack of stated purpose and preparation, combined with a lack of trust and communication, remain the primary reasons businesses fail to survive the next generation of ownership. The good news is, with proper guidance and preparation, family businesses can overcome these and other business challenges.

Are you a family business owner? Download our Top 10 Tips for Family Business Success now.

Visit our online Newsroom to learn more about recent PFS news, awards and recognition.

Market & Economic Update

**We view the market declines experienced to date in  December as a retest of the October–November lows. The Dow Jones index has fallen approximately 13% which places us in a current correction period very similar to the one we experienced in January of 2015. Losses were driven primarily by three issues: the risk that U.S.-China trade talks fall apart, concerns about a Federal Reserve (Fed) policy mistake, and sharply lower oil prices, all of which contributed to increasing concerns about slowing global growth or potential recession. Below, we summarize our views on these issues and discuss prospects for a potential stock market rebound based on technical analysis.

Trade Progress Has Been Made

We continue to see the U.S-China trade dispute as the biggest headwind for stocks. Against that backdrop, it’s understandable that stocks threw a tantrum after U.S. trade officials walked back part of the apparently overly optimistic initial recount of the Trump-Xi meeting at the G20 summit that has given rise to the admittedly already overused “he said, Xi said” phrase on Wall Street (Xi is pronounced “she”). The initial reaction to the Trump-Xi dinner at the summit was positive, with the United States suspending plans to raise tariffs to 25% on January 1 while the two countries intensify talks to work toward a resolution over a 90-day period (a so-called “trade truce”), ending March 1. After the G20, we emphasized that, while not a resolution, a path toward progress on trade should be viewed favorably. Unfortunately, mixed messages have come from both sides in recent days. Keep in mind that the U.S., right or wrong, has seen China as the instigator of the trade war as they make it extremely difficult for U.S industries to do business in China, coupled with China’s ongoing efforts to steal trade secrets from U.S. companies. The U.S. believes the best time to “battle” China is when our economy is strong and can withstand these headwinds. In the meantime, markets will continue to be volatile due to uncertainty.

We do not expect the arrest of an executive from Chinese telecom equipment provider Huawei to derail a possible trade deal. Importantly, credible Chinese officials expressed optimism for an eventual agreement after that news came out.

Worrisome Signals?

Risk of a full-blown trade war with China and some potentially concerning market signals have increased fears of recession. One such signal is the inversion of the short end of the yield curve, including the spread between 2- and 5-year Treasuries. But the yield curves that have historically been more predictive of future recessions (2-year and 10-year, and 3-month and 10-year Treasuries) have not inverted. And even if they do, history shows stocks can continue to go higher for a year or two. We believe the bond market is sending a slower growth signal and is not signaling a recession in 2019. Low interest rates overseas continue to put downward pressure on long-term rates in the U.S.

Sharply lower oil prices are also being cited by some as a sign of an impending recession. But oil’s weakness has been driven mostly by supply issues, including Iran sanctions, record levels of U.S. production, and elevated domestic inventories. We think OPEC’s decision to cut 1.2 million barrels of production at its December 6–7 meeting is a positive step toward resolving oil’s supply problem and can help stabilize prices. Bottom line: When we look at these and our other favorite leading indicators, we believe the odds of recession in the U.S. in the coming year are low.

Risk of a Fed Policy Mistake Has Eased

Fears of a policy mistake by the Fed have also caused recent market weakness. The Fed has been a cause of past recessions and could be again. But we believe Fed Chair Jay Powell’s speech on November 28 provided evidence of more flexibility from the Fed, thereby limiting the chances of overtightening. Powell essentially told the markets the central bank would not be as aggressive in 2019 as many feared.

Also consider the early December Wall Street Journal report that Fed officials were actively considering signaling a wait-and-see mentality after their likely interest rate hike in December (odds of a December hike being priced in by the bond market have fallen by 12 percentage points to 69% since Powell’s speech).

We think falling asset prices, slower economic growth overseas, tariffs, housing market softness, falling oil prices, and lower inflation expectations all add to the Fed’s “cover” to ease up on rate hikes, which could be a positive stock market catalyst in the coming weeks.

Bottoming Process Progress

From a technical analysis perspective, the S&P 500 continues be range-bound between 2480 on the low end and overhead resistance at 2800. However, recent volatility within this range may have provided one of the most important ingredients of a stock market bottom: fear.

As the S&P 500 Index tumbled more than 8% to date in December, we saw elevated put/call ratios, increased volume, and extremely negative breadth, all of which gave a “sell what you can” feel to the market. We see these signs of fear—as the S&P 500 remained above recent lows—as bullish. Perhaps more important than the sentiment indicators, though, was the reversal off of support December 6th, which means we may be forming a triple bottom around the 2480 level of the benchmark index. This retest of prior lows is an important part of the bottoming process.

Looking forward, we would like to see strong demand for stocks following the extreme risk-off mentality. This could potentially be in the form of strong breadth (significantly more advancers versus decliners), small-cap leadership, or a reversal of recent leadership from defensive sectors such as utilities and into more economically sensitive sectors such as financials and industrials. Above the 2800 level on the S&P 500, stocks may encounter resistance near 2870, while on the downside, below Friday’s closing low about (2480), we would look to the intraday lows from February, near 2530, as the next level of support.

Closing Remarks

While these issues need to be monitored, they do not change our opinion that U.S. stock market fundamentals remain generally favorable. Moreover, we think stock prices are reflecting much of the risks discussed above, and the latest move lower represents a retest of recent lows, not the start of a bear market. At the same time, we are mindful of the impact that lower asset prices and the slowdowns in business investment and home prices can have on consumer sentiment and corporate confidence.

We recognize that market volatility can weigh on investor confidence and encourage investors to focus on the many fundamentals supporting growth in the economy and corporate profits. We reiterate our fair value range of 2900–3000 for the S&P 500 at year end. Although stocks may run out of time to get there in 2018, with only a handful of trading days remaining, we believe the S&P 500 is trading below fair value and see potential for solid gains for stocks in the year ahead.

We continue to monitor risks and adjust our portfolios to ensure our clients’ investment strategies remain aligned with their stated investment objectives. Please don’t hesitate to reach out to your experienced team of wealth advisors at 440.740.0130 if you or someone you know has questions or concerns about your personal or business finances – your Return on Life® is always our top priority.

We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.

Real People. Real Answers. 

Health, Happiness, and Good Fortune,

Frank Fantozzi
President & Founder

To review our privacy policy, ADV Part A and ADV Part B, please visit our website at

**Research sources provided by LPL Financial, December 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment.

Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume, and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results.


The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor, and separate entity from LPL Financial.

Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC

Using a Charitable Trust to Pay for College

Written by: Dan Goldfarb

The charitable remainder trust (CRT) is a versatile tool that enables you to support favorite charities while retaining an income stream. CRTs are popular because they can provide tax benefits, including when you use the trust to pay college expenses. For example, if you place appreciated securities in a CRT and use the trust assets to help pay for college, you may be able to avoid significant capital gains tax.

How it works

CRTs are irrevocable trusts that provide one or more charitable beneficiaries with a remainder interest. You contribute stock or other assets to the trust, which pays you or another noncharitable beneficiary an income stream for life or for a term of 20 years or less. After that term, the remaining assets (which must initially have been worth at least 10% of the trust’s total value) are distributed to the charitable beneficiaries you’ve specified.

Typically, CRTs are designed as charitable remainder unitrusts (CRUTs), which pay out a fixed percentage of the trust’s value, recalculated annually. The percentage can range from 5% to 50%.

When you make contributions to the trust, you enjoy a charitable income tax deduction equal to the present value of the charitable beneficiary’s remainder interests. Also, because the trust is tax-exempt, the trustee can sell appreciated assets tax-free and reinvest the proceeds in income-producing assets. If you choose, annual payouts can be made to your children or grandchildren for college expenses.

FLIP-CRUT option

If your children are younger, the trust can be designed as a “FLIP-CRUT.” With this tool, the trustee places assets in investments that generate little or no income, allowing them to grow tax-free.

A FLIP-CRUT allows annual unitrust payments to accumulate for distribution in later years. On a specified date, or after a triggering event (such as a beneficiary beginning college), the trust automatically converts into an ordinary CRUT. The trustee shifts the assets into income-producing investments and begins distributing current unitrust payments to the noncharitable beneficiaries.

Unitrust payments are taxable — likely at your tax rate. But with planning, the bulk of these payments will be taxed as long-term capital gains or qualified dividends.

Complex option

The CRT is a complex tool, and you’ll want to discuss your various options with legal and financial advisors. But if you’re looking for a way to fund college expenses while eventually also donating to charity and avoiding a big capital gains hit, it may fit the bill.

Your Responsibility When Hiring Household Help

Written by: Cynthia Yang

When you hire a housekeeper, nanny or other domestic worker, you don’t just acquire an employee but also a set of tax responsibilities. Proper filing and reporting enables your worker to build an employment record and gain access to Social Security, Medicare and other benefits. And it helps protect you from potentially expensive and time-consuming legal trouble.

Your responsibilities

In general, if you pay a household worker at least $2,100 in 2018, you also must pay Social Security taxes of 6.2% on cash wages of up to $128,400, as well as a Medicare tax of 1.45% on all cash wages. “Cash wages” includes compensation paid by check or money order, but not the value of food, lodging or other noncash compensation.

You also need to withhold and remit the employee’s share of Social Security (6.2%) and Medicare (1.45%) taxes. If you cover the employee’s share yourself (adding up to 7.65%), include that amount as additional wages for income tax purposes, but not for reporting Social Security and Medicare.

If you pay an employee at least $1,000 in any calendar quarter, you may owe federal unemployment (FUTA) tax. This is 6% of the employee’s cash wages — up to $7,000 each year — though this amount may be offset by a credit. Some states also impose their own unemployment tax.

Keeping good records

For all domestic workers, you’ll need to keep records of:

  • Names,
  • Addresses,
  • Social Security numbers,
  • Cash and noncash wages paid, and
  • Taxes withheld or paid.

Retain this information for at least four years after the due date of the tax return on which the taxes were reported. In addition, obtain an Employer Identification Number (EIN).

By January 31 of each year, provide your employees with copies B, C and 2 of IRS Form W-2 (“Wage and Tax Statement”) for the previous year. Send copy A of the W-2 to the Social Security Administration. When you file your income tax return, complete and attach Schedule H, “Household Employment Taxes.” After calculating the total amount of Social Security, Medicare, FUTA and withheld federal income tax, you’ll add this to your income tax liability for the year. There may also be state filing requirements.

To avoid having to pay household employee taxes when you file your return, you can make estimated payments throughout the year. Or, if you’re employed, you can ask your employer to increase the amount of federal income tax withheld to cover these taxes.

Exceptions to the rules

Tax and reporting obligations don’t necessarily apply in some circumstances, even if an employee’s annual wages total more than $2,100. Examples include when the employee is your spouse, parent or child (and is under age 21) or the employee is unrelated to you but under age 18.

Using an independent contractor, rather than hiring someone as your employee, can also relieve you of some tax and reporting obligations. But the individual must be a bona fide independent contractor. The distinction between employee and contractor hinges on several factors, including how much control workers have over their work, and whether they offer services to the general public.

Professional assistance

Administrative tasks related to employing household help can be complicated. Before placing a want ad, talk to your tax advisor. You may also want to consider contracting with a tax professional or payroll service that specializes in domestic workers.

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.


Disability Insurance: Are You Really Protected?

Written by: Amy Valentine

Your ability to earn an income is one of your greatest assets. So, a disability that prevented you from working would be devastating to your financial well-being. Disability insurance can help protect this asset, but not all policies are created equal.

Ask questions

To determine whether a disability policy provides the protection you need, ask the following questions:

What does it cover?  Basic disability policies replace a portion — typically 45% to 65% — of your current monthly gross income. But this figure can be deceiving. The portion of your income it replaces depends in part on whether the benefits are taxed. Generally, if you pay the premiums on an individual policy, benefits are tax-free. But if you’re covered by an employer-paid group plan not taxed to you as compensation, benefits are taxable.

Most basic policies impose limits ranging from $10,000 to $15,000 on monthly benefits. Take an individual with a monthly gross income of $25,000 and a disability policy that replaces 65% of that amount. If there’s a $10,000 cap on monthly benefits, then the policy really covers only 40% of that person’s income.

Higher-end policies cover as much as 75% of income and offer substantially higher monthly limits. And some policies pay a lump sum at the end of the benefit period.

How does the policy define disability?  How an insurer defines “disability” greatly affects your ability to collect benefits. The most generous policies define total disability as the inability to perform the “material and substantial duties” of your own occupation. That means you would receive full benefits even if you find a job in a different occupation, regardless of how much you earn. So, for example, a surgeon who develops a tremor in her hands and can no longer operate might receive full disability benefits even if she switches to a different medical specialty and earns as much or more than before.

Other definitions may include:

  • Modified own occupation, where disability is based on an inability to perform your own occupation. But if you find gainful employment in another occupation, benefits are cut back or eliminated.
  • Transitional own occupation, in which benefits are reduced once your total income (including disability benefits and earnings from another occupation) surpasses your predisability income.
  • Any occupation, where you receive benefits only if you’re unable to perform the material and substantial duties of any Typically, this is a more difficult threshold to meet.

Note that some policies apply an “own occupation” standard for a specified period (such as 18 months or two years) and then switch to a different standard.

Is partial disability covered?  A partial disability can have a significant impact on your ability to work. For example, you might be able to perform your own occupation, but not full time. Some policies offer partial disability benefits, such as a 50% benefit if a disability causes your income to decline by 20% or more, and a 100% benefit if your loss is 80% or higher.

What about benefit and elimination periods?  The benefit period can vary dramatically from policy to policy. Some policies pay benefits for as little as one or two years, while others pay benefits until age 65 or longer. The elimination period is the amount of time — usually 30, 60 or 90 days — you must wait after becoming disabled before benefits begin.

Bridge the gaps

To determine your level of protection under a disability policy, review its terms and calculate the gap between your current income and the benefits you’d receive if you became disabled. If the gap is large, consider purchasing supplemental or replacement coverage.

No Gain, No Pain: Year-End Tax Planning for Investors

Written by: Frank Fantozzi

The end of the year is an ideal time to review your investment portfolio. You want to ensure it’s meeting your objectives and that the mix of assets continues to reflect your time horizon and risk tolerance. It’s also a good point at which to implement strategies for reducing your 2018 tax bill.

Harvest losses (and gains)

There are several tried-and-true tax strategies to consider, starting with harvesting losses. Have you realized net capital gains during the year? Assuming you’re in the highest tax bracket and subject to the 3.8% net investment income tax (NIIT), they’ll be taxed at rates as high as 23.8% for long-term gains and 40.8% for short-term gains. (See “Tips for tackling the NIIT.”)

To soften the tax blow, review your portfolio to see if there are any securities you can sell at a loss to offset the gains. If you end up with a net capital loss, you can even use it to offset up to $3,000 in ordinary income.

In some cases, harvesting gains — or selling securities that have appreciated — may be advantageous. For example, if you’ve realized net capital losses during the year, you might sell appreciated stock to diversify your portfolio, and use those losses to eliminate taxes on the gain. Capital losses can be carried forward indefinitely. Generally, there’s no need to offset them with gains simply for tax purposes.

Buy back a losing position

If an investment has declined in value, but you remain confident about its long-term prospects, consider selling it at a loss to take advantage of the tax benefits — and then buying it back. However, be sure you comply with the wash sale rule, which prevents investors from taking a current loss on a security if they buy a substantially identical security within 30 days before or after they sell it. So, if you sell a security at a loss, you’ll have to wait at least 31 days before you buy it back.

There’s a risk that the benefits of this strategy will be erased if the security’s price goes up during the waiting period. To avoid that risk, consider replacing your original investment with securities that are similar, but not substantially, to the ones you sold. For example, if you buy stock from a different company in the same industry or bonds from a different issuer, the 30-day waiting period won’t apply.

Know your basis

Mutual fund investors have special strategies to consider at year end. If you sell fund shares, you can reduce your gain or increase your loss by selling those with a higher cost basis. There are several ways to determine basis, but in general the best way to minimize taxes is to instruct your broker or advisor to sell specific, high-basis shares. (This is referred to as the specific identification method.)

Also exercise caution when initiating new mutual fund investments. Most funds distribute accumulated dividends and capital gains near the end of the year. But, contrary to popular belief, there’s no advantage to investing in a fund just before a distribution. In fact, it will cost you. Sure, you’ll receive a year’s worth of income shortly after you purchase the shares, but the value of those shares will be reduced by the amount of the distribution. In other words, you’ll pay taxes on taxable income that provided no economic benefit.

Make other plans

If you plan to make charitable contributions this holiday season, consider donating appreciated publicly traded stock. When you sell the stock and use the proceeds to fund a charitable contribution, you’ll owe capital gains (and possibly NIIT) on your profits. But if you donate the stock directly to a qualified charity, you’ll avoid those taxes while still enjoying a charitable deduction equal to the stock’s market value (subject to certain restrictions).

Year end is also a good time to review your portfolio’s asset allocation and correct any imbalances that have developed. One way to avoid the tax costs often associated with rebalancing your portfolio is to use tax-advantaged accounts, such as IRAs or 401(k) plans. Suppose, for example, that your portfolio has become too stock-heavy. To correct this imbalance, you might sell stocks held in retirement accounts and reinvest the proceeds in taxable bonds, with no current income tax consequences.

Take stock of your situation

In most cases, year-end tax considerations should take a back seat to long-term goals and sound investment principles. Nevertheless, don’t overlook the impact taxes can have on your investment returns. Consult your advisor before making any major buying or selling decisions.


Sidebar: Tips for tackling the NIIT

If your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 for joint filers and $125,000 for married filing separately), you may be liable for the 3.8% net investment income (NII) tax. Generally, the tax applies to the lesser of 1) your net income from taxable interest, dividends, capital gains and other investments, or 2) the amount by which your MAGI exceeds the threshold.

To reduce your MAGI, your NIIT, or both, you might want to:

  • Defer income,
  • Accelerate expenses,
  • Increase contributions to tax-deferred retirement accounts,
  • Postpone the sale of capital assets,
  • Harvest capital losses,
  • Structure business or asset dispositions as installment sales, and
  • Shift investment income to certain family members in lower tax brackets.

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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