How to Reduce Your Tax Bill (Without Washington’s Help)

by Karim Rahemtulla
tax bill 0

The new year is fast approaching. And you may be waiting with bated breath for tax reform to pass.

If it passes in its current form, the landscape next year will be very different from this year’s. Many of the deductions that you’re used to - state and local tax deductions, medical deductions, or even mortgage and property tax deductions - will be limited or eliminated if the current bill passes. Even things like the deduction for alimony may go the way of the dodo.

But there’s one thing the media isn’t talking about... The new tax plan won’t touch the rules for deducting capital losses or the rules for wash sales.

Many of you are familiar with the rules regarding deducting losses from the sale of securities or investments. It was an unfortunate side effect of the Great Recession.

While you may be familiar with some aspects - such as deducting losses against gains - what about the tax implications of unrealized losses?

Unrealized losses are the losses on stocks that you don’t want to sell because you think they may move higher during the wash sale period. The wash sale rule prohibits you from selling a stock or option (or pretty much any security) for a loss if you buy back a “substantially identical” security within 30 days.

The rule is decades old, and the definition of “substantially identical” is vague. However, buying back the same shares or options is considered substantially identical.

There is a workaround, however. You can buy a different company’s stock or option. This works in sectors where all the companies tend to rise and fall in tandem.

For example, if you take a hit on an oil stock like Exxon Mobil (NYSE: XOM), you can sell the shares and take the loss against any gains you may have accumulated or qualify for the $3,000 capital loss deduction. At the same time, you can buy shares in a company like ConocoPhillips (NYSE: COP) or Chevron (NYSE: CVX) so you don’t miss a potential rally in prices.

The best sectors to do this with are travel, finance and natural resources. It doesn’t work well in sectors where companies’ products move independently of one another. Biotech is a perfect example.

According to the government, tax reform is going to simplify the process for millions of people.

Riiiight.

It’s incumbent upon you to do your homework when it applies to the tax treatment for investments. If you don’t know what the proposed reforms are, you are doing yourself a massive disservice.

This website is a good source of information on some of the major items in the proposed reforms. Always consult with your accountant about your specific situation.

Judge Learned Hand probably said it best: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes.

“Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.”

Good investing,

Karim

Thoughts on this article? Leave a comment below.

One of Karim’s Latest Option Plays

Karim is quite knowledgeable about tax minimization - but his real expertise is in the field of options trading. That’s why he operates the Automatic Trading Millionaire service, an options trading advisory that has brought huge profits to its subscribers.

One of Karim’s latest recommendations is to sell puts on Halliburton (NYSE: HAL). Here’s Karim introducing the play earlier this month...

The number of active U.S. rigs drilling for oil is still rising.

According to the CEO of Halliburton, that inflection point was the first quarter of 2017. The company sees strong revenue growth this year, especially for North America. Halliburton knows a thing or two about oil services.

I share the company’s optimism. Oil prices, in my opinion, are not going to rocket upward next year. They really don’t need to. They just need to stabilize between $40 and $55 - preferably closer to the $50 level, below where they are today. There are several indications that prices will do that.

First, OPEC and Russia are not producing more oil but curtailing production to bring the market into balance.

Second, global economic growth means more oil consumption. We are at least a decade or more away, still, from a major shift to alternative non-fossil fuels. Right now, oil, natural gas and coal are the three dominant fuel sources in the world.

Third, a sustained increase in activity in the oil and gas fields has never resulted in less demand for service companies like Halliburton.

Fundamentally speaking, in order for Halliburton to see growth, it has to have pricing power. When the price of oil collapsed, so did the ability to raise prices for its oil field services. That is changing.

In a recent release, the company announced that it was able to push through price increases. That is an excellent sign that the industry is recovering.

While Halliburton is attractive at current levels of more than $41, well down from the mid-$70s achieved in 2014 and its 52-week high of $58.78, I want an added measure of safety just in case the price of oil settles toward $40 and not $50 in the next few months. In other words, I want it much cheaper!

Using the Automatic Trading Millionaire strategy, we’re going to try to buy Halliburton for much, much less!

It’s currently trading at more than $41. Would you like to own it for less than $32.50 or get paid $640 for trying?

Sell to open the Halliburton June $32.50 PUTS (HAL June 2018 $32.50 Puts) for $0.60 or higher to take in at least $600 on a 10-contract trade. The current share price for Halliburton is $41.62.

Our adjusted cost if we get put will be $31.90, a whopping 23% discount to market off the current price and almost $6 below the 52-week low of $38.18. The option is currently trading for $0.64 on the bid and $0.69 on the offer. Use a limit order, and try to get as much as possible but not less than $0.60.

The probability of being put Halliburton at the $20 strike is less than 20%. The margin requirement based on 15% margin is $487.50 per contract, or $4,875 for a 10-contract trade.

The potential return on margin if we are not put the shares and hold to expiration is $64/$487.50, or 13.1% in about eight months. I fully expect to close this position early, barring a market crash or a crash in oil prices.

Be sure to size your position according to your comfort level, understanding that if you get put the shares, you would have enough money to buy them. To achieve a payout of more than $1,000 from this trade, you would need to sell 17 contracts.

- Samuel Taube with Karim Rahemtulla

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