Fixing A Stock Problem With Your Bonds

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

You’ve made some wise picks in the stock market and figure it’s time to take some money off the table.

Problem is, Uncle Sam is waiting to take a bite out of your gains.

Can municipal bonds help ease the tax burden? Indeed, they can.

In the past few weeks, an avalanche of muni-bond fund redemptions forced managers to flood the market with bonds, resulting in market value declines.

Meantime, most stock portfolios have experienced substantial gains in 2018.

This combination of events now affords municipal bond investors an ideal opportunity: A “tax swap.”

Fixing A Stock Problem With Muni Bonds, Tax Swap

Tax swap enables investors to take a capital loss, while earning muni interest

Here’s how it works: Investors can sell the stocks on which they choose to take profits and also sell some of their muni bonds at a loss.

They then use the proceeds from the bond sale to acquire other muni bonds.

This enables them to take a loss for tax purposes, offsetting capital gains, dollar for dollar (short or long term), without losing their position in the muni market or missing a day of interest.

No other market affords this simultaneous opportunity without running afoul of the IRS “wash/sale rule.”

We normally don’t recommend selling your municipal bonds.

Although some long-term individual bonds have declined in value, they continue to pay interest with a stated maturity date and a promise to return principal.

It’s not unusual for market values to fluctuate and it doesn’t pose a problem for muni investors focusing on generating tax-free income – the chief advantage of munis.

In this instance, however, a sale makes sense.

This is a rare – but not unheard of – opportunity.

Longtime clients and friends recall a similar alert we issued back in 2013 (“How to Gain from A Loss”).

Similar conditions exist today.

Tax swap highlights advantages of long-term bonds

A tax swap demonstrates another significant advantage of owning long-term, tax-free bonds.

But they haven’t been implemented widely in recent years because most bonds were valued above their cost.

Keep in mind, even if you have no gains, you may still want to avail yourself of this tool.

The IRS allows you to offset up to $3,000 per year of your adjusted gross income and carry forward any remaining losses, dollar for dollar, into ensuing years.

So if you had the foresight to invest in Netflix, Amazon, Google or other high-performing stocks, congratulations.

And if you’re ready to reduce your exposure and ease your tax burden, another smart move is at hand.

But keep in mind: This year will bring a resurgence of tax trading by institutions as well as individual investors.

These trades become increasingly difficult to implement late in the year as the December 31st deadline looms.

Ask your FMS representative to propose a beneficial swap for you.

Be sure to consult your tax professional to discuss how this strategy applies to your specific situation.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Oct 15, 2018

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.