by Archie M. Richards, Jr., CFP^®
November 4, 2002

Yes, I know, April 15 is when you have to pay your taxes. But if you wade through the tax mud in November and December, you might reduce the payment due in April. Regarding securities, here are things to consider before year-end:

Obtain a blank Schedule D from last year's Form 1040 tax return. You can download the form from www.irs.gov > Forms & Publications.

Group the securities you've held for one year or less. If you have gains (who knows; you may have a few), net the gains against the losses. These are the short-term holdings. Do the same for the securities held for over a year.

Take into account any losses you're carrying forward from last year's return. You almost certainly have a carryforward loss this year if you deducted the maximum $3,000 in losses last year. Last year's Schedule D shows whether the loss is short term or long term.

Also take into account capital gains distributions from mutual funds. Your funds may have incurred net gains on the sales of securities. (Well, there's a chance.)

Okay, combine everything together. Here are the tax treatments:

• Net short-term gains are taxed as ordinary income, subject to potentially high tax rates, like your earned income, interest, and dividends.

• Net long-term gains are taxed at a maximum of 20 percent (10 percent if the top tax bracket on your ordinary income is lower than 27 percent).

• Losses are deductible up to $3,000 for this year. Additional losses are carried forward to future years, deductible at $3,000 a year.

Don't you love all this simplicity? Tell your congressional representatives how much you love it. You'll find their email addresses at www.house.gov and www.senate.gov.

If the combination of all your gains and losses produces a net loss, you can offset it by selling securities that have gains. If the loss is net short term, sell securities that have short-term gains. If the loss is net long-term, sell those with long-term gains.

But let's say you'd like to continue holding a stock that currently stands at a loss. Sell the shares anyway. Wait at least 31 days. Then buy back the same stock. (If you buy back in 30 days or less, the loss will be disallowed.)

Alternatively, let's say you're optimistic about the stock and don't want to be without it for 31 days. In this event, don't sell the stock; buy more of it instead. Wait at least 31 days. Then sell the shares you bought earlier that now stand at a loss. To benefit from this tax-saving technique, keep track of each purchase you make - the name of the stock, the date of purchase, the number of shares, price, and total cost. When you later take the loss, identify to the broker exactly which lot you're selling - date of purchase, price, and total cost. This information appears on the broker's confirmation of the sale and shows the IRS that it's not the shares you bought 31 days ago you're selling; it's the ones you bought originally and currently hold at a loss.

All this may result in too much buying and selling. Calculate the likely commissions, the spreads between bid and asked prices, and other transaction costs. If the reduction in tax isn't worthwhile, forget the sale and the later purchase (or the doubling-up and later sale). Just hang on to the stock that stands at a loss and pay the darn capital gains tax on the gains.

If you hang on to a stock for at least 5 years and sell in 2006 or later, the maximum capital gains will be lower than 20 percent. If you hang on until you die, the capital gains tax will be wiped out altogether.

As a lark, keep track of the time you spend planning for and preparing your taxes. Multiply by your hourly rate of pay. You can't deduct the value of your time in your return, of course. But the calculation supplies additional ammunition for the email to your Congressional representatives concerning your true feelings about income taxes.