Top Year-End Investment Tips

Just what you need, right? One more time-consuming task to be taken care of between now and the end ...

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jeremy taylor menifeeJust what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and investing decisions before December 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you'll owe next April.

Look at the forest, not just the trees

The first step in your year-end investment planning process should be a review of your overall portfolio. That review can tell you whether you need to rebalance. If one type of investment has done well--for example, large-cap stocks--it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether that rebalancing should be done before or after December 31 for tax reasons.

Also, make sure your asset allocation is still appropriate for your time horizon and goals. You might consider being a bit more aggressive if you're not meeting your financial targets, or more conservative if you're getting closer to retirement. If you want greater diversification, you might consider adding an asset class that tends to react to market conditions differently than your existing investments do. Or you might look into an investment that you have avoided in the past because of its high valuation if it's now selling at a more attractive price. Diversification and asset allocation don't guarantee a profit or insure against a possible loss, of course, but they're worth reviewing at least once a year.

Know when to hold 'em

When contemplating a change in your portfolio, don't forget to consider how long you've owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, that rate could be much higher. Long-term capital gains on the sale of assets held for more than a year are taxed at lower rates: 15% for most investors, 0% (through tax year 2012) for anyone in the lowest tax bracket. (Long-term gains on collectibles are different; those are taxed at 28%, and special rules apply to certain property held for five years or more.) Those rates are currently scheduled to change in 2013, increasing to 20% for most investors and 10% for those in the lowest tax bracket.

Your holding period can also affect the treatment of qualified stock dividends, which currently are taxed at the more favorable long-term capital gains rates. (You must have held the stock at least 61 days within the 121-day period that starts 60 days before the stock's ex-dividend date; preferred stock must be held for 91 days within a 181-day window. The lower rate also depends on when and whether your shares were hedged or optioned.) However, as of 2013, dividends are once again scheduled to be taxed at ordinary income rates.

Make lemonade from lemons

Now is the time to consider the tax consequences of any capital gains or losses you've experienced this year. Though tax considerations shouldn't be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.

If you have realized capital gains from selli