- Since 2015 has been a very volatile stock market and year to date the overall market is about flat. This means a lot of buying and selling, but little gain.
- This puts investors in a position for a major tax shock from large distributions but flat performance.
- You will get socked with a hefty capital gains distribution that is taxable, but your overall investment might be flat or down.
What to Do Now:
- Examine mutual funds in your taxable accounts, looking for early December announcements that show expected distributions.
- Decide whether you are better off selling your stock for a gain or loss, before the distribution
- DO NOT buy any mutual fund just before a distribution date, “normally called buying the distribution”, it can be a big tax mistake.
Here is a classic example from last year:
Fidelity Select Biotechnology Portfolio (FBIOX) is a well-respected mutual fund consisting of popular biotech stocks such Gilead, Biogen, Alexion etc.
Let’s say you bought 300 shares of this mutual fund in February 2014 @ $226/share = $67,800
On December 4, 2014 the stock price was $239/share, a $13/share gain
However on December 5, 2014 Fidelity declared a capital gains distribution of $23.84/share, you received $7,152 or another 30 shares. You now own 330 shares. Due to this distribution on December 5th the stock closed at $218.42.
Therefore on December 5th you have 330 shares @ $218.42 = $72,078
Your total investment went up by $4,278
However you will pay Capital Gains tax (possibly short-term gains) on $7,152, and you haven’t sold any shares yet.
According to Jim Lovell’s Fidelity Investor here is a list of Fidelity’s Top 20 Favorite Stocks – the most owned, and hence most liked, by Fidelity’s top managers. This is an interesting list, it includes 3 of Jim Crammer’s “FANG” recommendation, Facebook, Amazon, Netflix (not included) and Google.
I own the bold highlighted stocks. I haven’t liked bank stocks for a long time since I don’t see them making any real money until we have substantial rate hikes. I own Master Card instead of VISA and I should have bought Microsoft and GE before their big move up, I’ll have to wait for them to go on sale.
Which of these do you own?
#1) Apple (APPL)
#2) Alphabet Google (GOOG)
#3) Facebook (FB)
#4) Gilead Sciences (GILD)
#5) iShares ETFs
#6) Wells Fargo (WFC)
#7) JP Morgan Chase (JPM)
#8) Biogen (BIIB)
#9) Berkshire Hathaway (BRK)
#10) Visa (V)
#11) UnitedHealth Group (UNH)
#12) Salesforce (CRM)
#13) Microsoft (MSFT)
#14) Amazon (AMZN)
#15) Allergan (AGN)
#16) Disney (DIS)
#17) CVS (CVS)
#18) Bank of America (BAC)
#19) General Electric (GE)
#20) Starbucks (SBUX)
When I was preparing taxes returns as an IRS certified volunteer with Pasco County United Way earlier this year I had a number of families with large tax bills due to Obamacare.
If you or any member of your family does not have an Affordable Care Act (ACA or Obamacare) compliant healthcare plan you could be looking at a large penalty in 2015 and an even bigger one in 2016. In short, you owe the penalty for any month you, your spouse, or your tax dependents don’t have insurance that qualifies as minimum essential coverage. You can find coverage that counts here.
Let’s look at the history of this penalty:
- In 2014 the penalty was the higher of:
- 1% of household income, maximum of average Bronze plan, or
- $95/adult, $47.50 per child under 18, maximum $285
- In 2015 the penalty is the higher of:
- 2% of household income, maximum of average Bronze plan, or
- $325/adult, $162.50 per child under 18, maximum $975
- In 2016 the penalty will be the higher of:
- 2.5% of household income, maximum of average Bronze plan, or
- $695/adult, $347.50 per child under 18, maximum $2085
Based on these 2016 calculations a married couple, with 2 children and $70,000 in income would pay a $2,085 penalty when they file their 2016 taxes.
I just dread informing families that are struggling to make ends meet that not only won’t get that refund they were anticipating, but they will owe money for Obamacare.
If you listen to listen to conventional wisdom (I don’t) and invest a fair portion of your portfolio in bonds you’ll need to understand how to calculate the real yield, not what a broker or financial advisor can advertise.
Your financial advisor suggests that you buy a high-quality Muni Bond, because of its quality you of course pay a premium, $110. This is not at all unusual. The bond coupon is 4%, your financial advisor is allowed to advertise this rate, and you’ll make $4 a year. This looks to be a pretty good yield and a safe investment. You might also notice that today Barclays Muni Bond Index yields 2.2%, you’re getting a better deal with no additional risk.
Maybe not, let’s do some math.
You have owned this bond for 4 years. Each quarterly brokerage statement shows a 4% yield and will show that you are getting your portion of the $4 annual dividend. Now the bond gets called early or matures and you get back $100. In the 4 year example your actual gain was only $6, or 1.5% yield.
Here is what you need to know.
- Brokers and financial advisors operate under an industry self-regulator called Municipal Securities Rulemaking Board and it allows them to the yield based on the bond sale price on each statement.
- A mutual fund or ETF falls under federal accounting and tax rules and will report the yield based on what you’ll actually get.
- If you buy a bond ask your broker or advisor to calculate a “yield to worst” return. If he/she won’t do some math yourself.
- Check your bond for a “callable” date, if it is still many years out it may help in your calculations.
It always pays to become educated in what you’re investing your hard earned money in.