Phantom Capital Gains | October 2015

Last month I introduced myself to you, and I thank you for reading and for those who gave me a call or dropped a note to say you had seen and read my column. Depending upon the gentility of the reader, the most often heard comment was some version of, “You didn’t say (a) anything too controversial, (b) anything I could act upon today, or (c) much of anything at all!” Friends from my youth asked what happened to my hair, but that’s a subject for a different time.

Okay, I admit I kept it pretty general and low-key for my first column in the Sun community newspapers, but I do want to remind you that I did say one thing to you that is essential for your financial well-being: Have a Plan!

And please remember that the adages you have heard about planning apply. Including:

  • If it’s not written down, it’s not a plan.
  • A plan must have clearly-stated, measureable, goals.
  • For a plan to be of any use it must be monitored on a regular basis and be flexible enough that it can be modified as life’s circumstances change.

But today, let’s jump to something very specific, and some planning you need to do before the end of the calendar year.

We have all seen the stock market drop, see-saw, and drop some more in the late summer and early fall of 2015.   While this has damaged your statements, if your investment horizon is long-term, this shouldn’t pose too much of an issue for you.

What is of significance, however, is that in the early part of 2016 many investors may be having a conversation with their financial advisors that will begin with something like this:

“Let me understand this, Mr./Ms. Trusted Financial Professional.   The markets were down at the end of the year, and so my account balance is down for the year, right?   My 1099 tax document shows a large capital gain that I have to pay taxes on, right? So I lost money in the markets, I have to pay taxes on some gain I’m not seeing in my account, and on top of that I paid you a fee for this?”

Please let me insert a disclaimer right now. It’s October, and I absolutely do not know if the markets are going to be up or down by year’s end. I also do not know what your specific situation might be. But I do know that many mutual fund companies have had large internal capital gains over the past six or seven years, and with the recent market volatility many of those gains were realized by the mutual fund companies. Mutual fund companies began providing estimates of year-end capital gain payouts in early October, and some of those estimates are startling.

My call to action is this: You need to have a conversation about this matter with your financial advisor and tax professional ASAP, to avoid a tax surprise due on April 15th of 2016. To address this situation, you cannot wait until year’s end. Mutual fund companies declare capital gain payouts throughout the last quarter of the year. Once that occurs, your opportunity for taking action has passed. You always need to consider the tax ramifications whether you are buying, selling, or holding, but 2015 might be shaping up to be a unique year that includes both market losses in your investments, and simultaneous capital gains taxes.

So put down the paper, go see your advisors, and make a plan for 2015 Q4. Do it now!