It was nice to finally be able to work on a tax guide without having to deal with any federal government drama. Last year, the Internal Revenue Service was behind schedule announcing 2014 inflation adjustments because of the government shutdown. The year before, we had to cope with the fiscal cliff situation. We delayed publishing the 2012 tax guide until the January 2013 issue, and even then we still had to publish an update two months later.

This year, we have pretty good clarity on what 2014 and 2015 tax rates, exemptions, deductions, phase-outs and limitations are. There are few numbers still unresolved, such as the 2015 mileage deductions, but most of the needed data was available before we sent this issue to the printer. From the standpoint of putting together the guide, this was a welcome change.

It is possible that legislation reauthorizing so-called tax extenders could be passed between the time I write and the time you read this commentary. These extenders include deducting state and local sales taxes, treating mortgage premiums as qualified interest, parity for mass transit and parking benefits and tax-free distributions from IRAs to charities. Congress had just started its lame-duck session when we sent this issue to the printer and had yet to debate renewing the extenders.

As we note in the guide, the biggest changes directly impacting investors occurred outside of the legislative process. Effective January 1, 2015, rollovers of individual retirement accounts (IRAs) will be limited to one per year. Those of you who have previously made pretax and aftertax contributions to an employer-sponsored retirement account can now split distributions on the same lines. You simply need to instruct your plan administrator which account should receive the pretax dollars and which account should receive the aftertax dollars before the distributions are made.

Some political observers think tax reform could be addressed in 2015. This is something that is long overdue. Making meaningful progress on tax reform will require a reduction in the amount of animosity between members of both political parties. It will also require a willingness to go against special interests and to accept compromises that may not play so well on the campaign trail. In other words, it is a big task. If you want to pressure your representative and senators to start working on tax reform, send them a letter telling them so.

Regardless of what Congress and the White House do or don’t do, there is no substitute for understanding how the tax laws apply to you and operating within their constraints. For example, a subscriber to AAII Dividend Investing asked about tax-loss harvesting. He wanted to sell a stock at a loss, wait at least 30 days, and then repurchase it. Doing so would allow him to reduce his capital gains for this tax year. It’s perfectly legal to do so, but I told him to pull out the calendar and look at the ex-dividend date. In order to receive the preferential tax treatment of qualified dividends, a stock needs to be held for more than 60 consecutive days within a 121-day window surrounding the ex-dividend date. Failure to do so would result in the dividend payment being taxed at the ordinary marginal rate.

The 30-day post-sale waiting period is required by the wash-sale rule. The wash-sale rule says a capital loss cannot be claimed if the substantially identical security is bought within 30 days after the sale recognizing the loss was made. Kevin Trout explains the rule in greater detail here.

I realize taxes are not a fun subject for most, but I hope you find our annual guide helpful. As you read it, if you find yourself having additional questions, I suggest contacting a tax professional for assistance. The tax code is complex and the amount paid for assistance can be a bargain relative to the costs and aggravation of an audit.

Wishing you prosperity,

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII