​Mutual funds benefit from the long-standing belief that they allow investors to diversify their holdings without buying individual stocks. But to the unwary investor, tax surprises abound. From a tax planning viewpoint, here are some great mutual fund tips. Most of these tips assume your mutual fund investment is not in a retirement account (like a 401(k) or traditional IRA), unless otherwise noted.

As the year comes to an end, there are several tax-saving ideas you should take into consideration. Use this checklist to ensure you don't miss an opportunity before the year is over.
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• Retirement distributions and contributions. Make final contributions to your qualified retirement plan, and take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high.​
• Investment management. Rebalance your investment portfolio, and take any final investment gains and losses. You can use capital losses to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your taxable ordinary income.
• Last-minute charitable giving. Make a late-year charitable donation. Even better, make the donation with appreciated stock you've owned more than a year. You frequently can make a larger donation and get a bigger deduction without paying capital gains taxes.
• Noncash donation opportunity. Gather up noncash items for donation, document the items, and give those in good condition to your favorite charity. Make certain you obtain a receipt from the charity, and take a photo of the items donated.
• Gifts to dependents and others. You may give gifts to an individual of up to $14,000 per year in total. Remember that all gifts given (birthdays, holidays, etc.) count toward the annual total.
• Organize records now. Start collecting and organizing your end-of-year tax records. Estimate your tax liability and make any required estimated tax payments.

​Although the markets have been up a lot this year, your investment portfolio could have a few lemons in it. Using the tax strategy of tax-loss harvesting, you may be able to turn those lemons into lemonade. Here are five tips:

Your investments are divided into short-term and long-term buckets. Short-term investments are those you've owned a year or less, and their gains are taxed as ordinary income. Long-term investments are those you've held more than a year, and their gains are taxed at lower capital gains tax rates. A goal in tax-loss harvesting is to use losses to reduce short-term gains.

Example: By selling stock in Acme, Inc., John Smith made a $10,000 profit. John only owned Acme, Inc. for six months, so his gain will be taxed at his ordinary income tax rate of 35 percent (versus 15 percent had he owned the stock more than a year). John looks into his portfolio and decides to sell another stock for a $10,000 loss, which he can apply against his Acme, Inc. short-term gain.

​When you’re tax-loss harvesting, use IRS netting rules on the realized gains and losses in your portfolio. Short-term losses must first offset short-term gains, while long-term losses offset long-term gains. Only after you net out each category can you use surplus losses to offset other gains. Use this information to your benefit to reduce your taxable income when selling investments.

​In addition to reducing capital gains tax, excess losses can also be used to offset up to $3,000 of ordinary income. If you still have excess losses after reducing both capital gains and ordinary income, you can carry them forward to use in future tax years.

​The IRS forbids use of tax-loss harvesting if you buy a "substantially similar" asset within 30 days before or after selling it. Plan your sales and acquisitions to avoid this problem.

Tax-loss harvesting comes with costs in both transaction fees and time spent. Reduce the hassle by conducting tax-loss harvesting once a year as part your annual tax-planning strategy.

Remember, you can turn an investment loss into a tax advantage, but only if you know the rules.

When a person sells a capital asset, the transaction usually results in a capital gain or loss. Capital assets include inherited property or belongings someone owns for personal use or as an investment.

Here are 10 facts you should know about capital gains and losses:

1. Capital Assets Capital assets include property such as a home or a car. It also includes investment property, like stocks and bonds.
2. Gains and Losses A capital gain or loss is the difference between the basis and the amount the seller gets when they sell an asset. The basis is usually what the seller paid for the asset.
3. Net Investment Income Tax Taxpayers must include all capital gains in their income. Capital gains may be subject to the Net Investment Income Tax if the taxpayer’s income is above certain amounts. The rate of this tax is 3.8 percent.
4. Deductible Losses Taxpayers can deduct capital losses on the sale of investment property but can’t deduct losses on the sale of property they hold for their personal use.
5. Limit on Losses If a taxpayer’s capital losses are more than their capital gains, they can deduct the difference as a loss on their tax return. This loss is limited to $3,000 per year, or $1,500 if married and filing a separate return.
6. Carryover Losses If a taxpayer’s total net capital loss is more than the limit they can deduct, they can carry it over to next year’s tax return.
7. Long and Short Term Capital gains and losses are either long-term or short-term. It depends on how long the taxpayer holds the property. If the taxpayer holds it for one year or less, the gain or loss is short-term.
8. Net Capital Gain If a taxpayer’s long-term gains are more than their long-term losses, the difference between the two is a net long-term capital gain. If the net long-term capital gain is more than the net short-term capital loss, the taxpayer has a net capital gain.
9. Tax Rate The tax rate on a net capital gain usually depends on the taxpayer’s income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain.
10. Forms to File Taxpayers often will need to file Form 8949, Sales and Other Dispositions of Capital Assets. Taxpayers also need to file Schedule D, Capital Gains and Losses, with their tax return.

Have a question about capital gains or losses? Give Ellsworth & Associates a call at 513.272.8400. We would be happy to help.