MoneyBrief: Cut your taxes and squeeze more cash out of your stocks...
Here's a scary thought... Before you know it, year-end brokerage statements, W-2 reports and income tax forms will be flooding into your mailbox. And... Marvin, your pesty cousin the accountant, will be calling to set up your favorite meeting of the year to review all your numbers.
You might be thinking, "No... I don't want to hear about taxes now. It still feels like summer. Please don't make me think about it until April 14th!"
But if you do a few things now, you might save some money in April. Now is a great time to put some strategies to use that will help you minimize taxes. And... what if there was also a way to put some extra money in your pocket right now?
To some people, Income Taxes are just a once a year event filled with the fun of going through endless receipts, forms, and brokerage statements followed by writing a big fat check to Uncle Sam. But smart investors start planning for taxes right now. In fact, they've been planning for taxes for the last few weeks.
If you have stocks in your portfolio that have gone down this year and are worth less than you originally paid for them, you might decide to sell them for a tax loss. The Internal Revenue Service allows you to use realized capital losses to offset any capital gains; or up to $3,000 in ordinary income. In essence, your stock market losers can become a smart tax-reducing tool. Some investors take their lumps and sell losing stocks to count against their gains for the year so they have a smaller tax bill. But there's a smarter way to minimize taxes and put even more money back in your pocket.
You can generate extra cash by selling call stock options on the stock and still have time to dump the stock for a write-off before the year-end tax deadline. How about an example? I'll use our favorite fictional company XYZ Widgets International (XYZ) for my example.
Let's say you originally bought XYZ for $35 back in January and today the stock sells for $22.88. You decide to sell the stock for a tax loss so you could take that $22.88 (a $12.12 loss) and be happy, but why not squeeze a little more cash out of the stock?
If you sell the November 25 XYZ call option, you could get $165 right now for every 100 shares of XYZ you own and on November 16th you might get another $212 for every 100 shares. NOTE: If you think XYZ is going to go above $26.65 by November 16th, then you should just hold the stock and sell it later or sell an option with a higher strike price... Or if you think the stock will go lower than $21.23 by November 16th, then you probably should sell the stock now and take your lumps.
How much better off are you using this strategy to squeeze more money out of your stock portfolio than just selling the stock?
If we assume XYZ stays right around $22.88 between now and November 16th, then you squeeze an extra $1.65 per share out of the stock before you sell it. You generated an extra 4.7% return (1.65/35) out of your original $35 investment over the 43 day period. That's a 39.9% annualized return. And after November 16th you could sell the December option for even more cash before you finally dump the stock at year end.
Even your cousin Marvin should be impressed with this strategy. Now all you have to do is get him to let you deduct your Hawaiian vacation as an essential business expense. Why not put it in as research? So what if your company makes snow shoes.
Finding the right strike prices for stocks you might want to try this strategy with is a challenge, luckily there are tools available that will get you the information you need so you can make the best decision possible. For more details on this strategy to minimize taxes and the tools to find the highest return (and lowest risk) investments, go to http://www.poweropt.com/