Faith Based Investing

Even though this has been a poor year for the market, you may realize short-term capital gains if you own mutual funds.  What do you do about them? You could do what many savvy investors do – you could “cash in your losses” and practice tax loss harvesting.

Selling losers to offset winners.

Tax loss harvesting means taking capital losses (you sell securities worth less than what you first paid for them) to offset the short-term capital gains you have amassed.

While this doesn’t get rid of your losses, it can mean immediate tax savings. It can also help you diversify your portfolio. It may even help you to position yourself for improved long-term after-tax returns.

The tax-saving potential.

Sure, you can use this technique to put your net gains at $0, but that’s just a start. Up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.¹

So by taking a bunch of losses this year and carrying over the excess losses into 2009, you can potentially shelter some (or maybe even all) of your long-term and short-term capital gains next year. This gives you a chance to shelter winners you’ve held (even for less than a year) from being taxed at up to 35%.¹

The strategy in action.

It is really quite simple. Step A is to pick out the losers in your portfolio. Step B is deciding which losers to sell and telling your financial advisor what you want to do.

However, both investor and advisor have to watch out for the IRS “wash sale” rule. You can’t claim a loss on a security if you buy the same or “substantially identical” security within 30 days before or after the sale.² In other words, you can’t just sell a stock or mutual fund to rack up a capital loss and then quickly replace it.

But … you might be able to avoid the wash sale rule by using an ETF to make a “tax swap”: an ETF for a stock or mutual fund, or even an ETF for another ETF if the ETFs are linked to different indexes.³ Although these “tax swaps” are widely done, this is still sort of a gray area, so consult a qualified tax advisor first.

Here’s a heads-up: a new IRS ruling (Revenue Ruling 2008-5) says you can no longer use an IRA to acquire “substantially identical” securities within the 61-day wash sale window – and you can’t boost your tax basis in said IRA by the amount of the disallowed loss.⁴

The (minor) drawbacks.

You may not wish to alter a carefully chosen portfolio to the degree that you must for tax loss harvesting, especially if it has been built for the long term. Also, you could end up missing a rally in which a stock, ETF or mutual fund you’ve sold could take off. Transaction costs do add up, so a fee-based account makes sense when tax loss harvesting.

Will long-term capital gains be taxed more in the future?

They could. President-elect Barack Obama has talked about possibly raising the long-term capital gains tax rate for taxpayers earning over $250,000 per year from 15% to 20%.⁵ Is that you? If so, you might think of triggering excess capital losses in 2008 and using the losses to shelter future long-term capital gains that could be taxed at a higher rate.

Not just a year-end tactic … also a year-round strategy.

Some investors harvest losses throughout the year, not just in December. You may want to ask your financial advisor how you can harvest losses this Christmas season and beyond.

Citations.

¹ smartmoney.com/personal-finance/taxes/a-down-stock-market-offers-tasty-tax-breaks/                      [10/29/08]

² irs.gov/publications/p550/ch04.html#d0e12561           [TY 2007]

³ filife.com/stories/market-meltdown-opens-door-to-tax-swaps-rebalancing             [10/26/08]

⁴ smartmoney.com/personal-finance/taxes/A-Sneaky-New-Twist-on-the-Wash-Sale-Rules-23611/?page=all         [8/6/08]

⁵ blogs.abcnews.com/politicalradar/2008/08/obama-clarifies.html               [8/14/08]

As a financial coach for the last 14 years, I can tell a person’s priorities by examining two key records: the check book and the calendar. The choices we ultimately make shape who we are as individuals. Our personalities, our character, our integrity, our morals, our values, and faith are exposed by our choices. They are often like an open book in how we live our lives. It does not take a genius to figure out that our priorities become pretty clear when you examine our money management skills: How we make money, spend it, save it, invest it, and other ways we use it, reflect the areas of life where we place the greatest importance.

When you examine the choices that you have as you make additional income, either from employment, your business, investments, or other forms, we really only have four choices to make on a short-term basis (not long-term). We can either: give it away, pay taxes, pay back debts, or spend it through our lifestyle choices. What if you only had one choice?

To Give it all away
What does it say about us if we gave everything we earned away? Well first of all it would be sacrificial, it would be bold, and it would go beyond reason. Is it fair to say that it would be illogical? The repercussions from a worldly sense could be homelessness, starvation, and a potential jail sentence for not paying taxes. Just to name a few. I am not saying that God would not step in and provide for you. I am saying that God gave us enough common sense to not give everything away while we were alive so that we could take care of at least the basic necessities.

To Pay our Rich Uncle Everything
What if we decided to pay it all to taxes? Noble, I guess. But for arguments sake, I’m sure there is no one on the planet that would want to give 100% of what they earn back to the government. Conservative, moderate, or liberal, I am sure most people would want some control where their hard earned dollars were going even if they chose to give it all away. Most would chose to give unto Caesar what is Caesar’s and give the rest according to God’s will.

To Pay Off Our Debts
What if we paid off all our debts? This would be incredible to be debt free and financially free until the government came knocking for its pay. This IRS problem would eventually lead to another kind of debt – one where you could be doing 5-10 and owe a $ gazillion dollars in late fees and penalties. It would be great to be free from the creditors, but would be impossible to avoid the IRS.

Spend, Spend, and then Spend Some More.
What if we chose to spend it all? Eat, drink, and be merry! Unfortunately, this one isn’t too far fetched. Many stretch themselves so thin that they are not only spending more than they earn, they keep borrowing to support their lifestyle. Of the four choices, most people choose this option for the majority of earnings. There is such a thing as too much of anything. Over-consumption leads to troubles.

Luckily as individuals, we do not have to make just one choice. There is good news and bad news. The good news is that we have several choices. We will most likely choose some of each. What percentage goes where depends on your income, priorities, and discipline. The bad news is that with each choice we have, the greater the opportunity for confusion. Most individuals in the short run choose to spend most on their lifestyle, pay as little taxes as possible, give very little away to churches and charities, and pay as little as required to pay off debts. This way of life is reflected in the rapid rise of personal debt and the declining state of church and charitable contributions. There is a better way!

There is a Chinese Proverb that says, “talk does not cook rice.” Thinking something and achieving it are two different paths. Picture two people: One is negative and imposes self limitation. He does not believe he can do it. The other is always optimistic yet never follows through on anything. If neither of them takes action, won’t they have similar results?

Rob insists that he needs a college degree to succeed and make more money in life. His self imposed ceiling are his thoughts that he needs a degree in order to change his financial destiny. If he wants proof this is not the case, he could watch any season of The Apprentice. Trump hand selects some millionaire entrepreneurs with and without college degrees. Some don’t even have high school degrees. For Rob, until he overcomes his self-imposed limitation, he is his own worst enemy. He thinks he cannot, therefore he is right.

Steve is just as guilty. He is always overtly optimistic. There is a silver lining in every cloud. No matter what happens, he remains positive. He always believes things will work out, yet he does nothing to position himself to succeed. Attitude is important, but when he sits around and does nothing to make things happen, his positive attitude leaves him with the same result as Rob.

The moral of the story is your attitude is important, but you have to have a game plan on how you will accomplish the goal. The man who is negative and the man who is positive end up with the same results if neither of them makes steps forward to improve their situation. Positive attitude is half the battle, the other half is finding a way to make it happen.

Anyone regardless of their background, education, or circumstances, can gain wealth if they follow certain steps. Many people separate wealth and living a “God honoring” lifestyle. Many associate a godly life as living without material wealth. God, on the contrary, wants us to prosper. There is nothing in his Word that says we must live in poverty.

What steps are you taking today to put yourself in a better financial situation? Are you allowing road blocks to get in the way? Are you optimistic yet don’t follow through? Wherever you’re at, change can happen with a game plan. The number one reason people fail financially is due to a lack of a financial plan. Plan today for a better future! After all, “Talk does not cook rice.”

photo credit: divya_

How do you spell Success? What is your measurement?
Ask the typical, worn out CEO who just got back from his local work-aholic anonymos meeting. His chapter meets once a year due to lack of time. He makes millions a year, millions more in stock options, works 100 hours a week, and has very little time for his family (whoever is left), friends (no time), or things he or she truly enjoys (work, work, and more work). Often priorities become one dimensional when money is used as a measure of success. Balance is truly achieved when God is first, family is second, career is third, and your spiritual, physical, mental, and financial priorities are in order. Money can never be a true measure of success.

A great formula involves two Cs and Two Ss:
Christ: By putting Christ first in our lives, the pieces seem to fall into place. When we abandon Him and try to face the world on our own, we often fail miserably. When we set our benchmark as the closeness we have to Him, nothing else compares.

Compassion: This involves the act of helping those around us who are in less than ideal situations. There are millions suffering from hunger, disease, depression, and despair. In a chaotic world, we are called to bring salt and light to this earth. Unselfish acts of compassion are always a victory no matter how small.

Sacrificing for others: We often give money, yet forget the most important element, which is the giving of ourselves. Like Christ sacrificed for others, his example shows us that every person in this world is equal. No one person has greater importance on this earth. We should be willing to help our brother – to unwrap ourselves from our own lives and be on the lookout for opportunities to serve others. I am just as guilty as the next guy. Lord, please change my heart and attitude so that I may be more willing to sacrifice myself for your glory. May I be an example to those that do not know you and may I be used as your vessel to do Your will on this earth. When this is prayed with honesty and sincerity, God will provide opportunities.

Significance: We often think of significance in terms of ourselves. How can we be significant? What if the world was not just about you? For some, this may be a shocking revelation. The world is not about you. There is something much larger, much greater – to fulfill God’s purpose for you. It may be a small or large part in the play. Learn your lines, rehearse, and get ready you are always on the great stage of life.

So the question is how do you personally define success? I’d love to hear from you.