If your portfolio is up, consider selling 'short against the box'

The Ticker

December 18, 1996|By Julius Westheimer

WITH THE Dow Jones industrial average standing this morning at 6,308.33 -- 2,473.89 points, or 64.5 percent above its Jan. 1, 1995, level of 3,834.44 -- you may wish to take some money off the table.

If capital gains taxes are holding you back, consider this offbeat strategy:

To preserve stock profits but delay paying capital gains taxes, sell stocks "short against the box."

Here, you "short" shares identical to the ones you already own. Your broker borrows and sells the shares on the open market.

Then you need not worry whether the stock rises or falls because you are both "long" (the shares you still own, i.e., the "box") and short. When you close out your short sale you turn over your shares to the lender.

This defers your gains -- and your taxes -- until next year, or longer. Most brokers can handle this transaction.

Speaking of deferring taxes, consider rolling your Series EE U.S. savings bonds that mature in 1996 into Series HH bonds. That way you defer accrued EE bond interest until you redeem your HH bonds. Banks can handle this tax-free transaction.

Another suggestion: Before buying a variable annuity with bonus or other money, fully finance your 401(k) and other retirement plans that allow you to save pretax dollars. Variable annuities should be bought only with after-tax dollars.

Accelerate charity payments by prepaying two, three or more years' gifts. Prepayment gives you 1996 tax savings.

Be aware that charity gifts of $250 or more must now be substantiated in writing by the charity. The IRS will no longer consider canceled checks sufficient evidence.

Also before the year's end, reduce your estate, and its taxes, by giving gifts. You eliminate the gift tax through the annual gift exclusion of $10,000 -- or $20,000 for couples. Do this by Dec. 31 zTC for this year's exemption.

This gift-giving program also allows your children, grandchildren, etc., to enjoy your money while you're still alive.

Speaking of tax-savers, remember what Judge Learned Hand declared in 1947: "Over and over again, courts have said there is nothing sinister by arranging one's affairs to keep taxes as low as possible. Nobody owes a public duty to pay more tax than the law demands. Taxes are enforced exactions, not voluntary contributions."

QUICK TAX TIPS: Ask your tax adviser about a "charitable remainder trust," a unique way to help charities and save tax money.

Note that, beginning Jan. 1, couples with one wage earner can contribute up to $4,000 a year to IRAs, up from $2,250 this year. Everyone eligible should take advantage of this new increase.

Also check out new penalty-free IRA deductions for large medical expenses and medical insurance.

Pub Date: 12/18/96

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