Taking tax advantage of stock losses
Wednesday, August 10, 2011
Admit it. When the market tumbled Monday and today, you panicked and unloaded a lot of your holdings.
Don't be embarrassed. You're not alone. And I'm not here to judge your portfolio moves.
I am here, however, to remind you that if you did take a loss this week, or any time of the year, be sure you don't waste it at tax filing time.
You can use a capital loss to help erase any taxable capital gains. Or, as today's Weekly Tax Tip also notes, if you don't have any gains, you can use the losses to cut your taxable ordinary income amount.
Working with both winners and losers: Ideally, you'll make money in the market. And through 2012, the capital gains rate on those profits is, for most investors, 15 percent. But not paying any tax is better. So if you have a loss, you can use it to offset your gains.
When planned, this is known as stock harvesting. You look for a struggling stock to pluck and sell as a way to balance your flourishing holdings you sold at a nice profit.
But sometimes gains are far and few between. And other times, like this tumultuous week, investors just bail out. Too often, those rash decisions produce unexpected losses.
If you don't have any gains to offset, at tax filing time you can subtract up to $3,000 of your year's losses from your ordinary income. Less income usually translates into a smaller tax bill.
If your losses are greater than $3,000 you can carry over the excess until the next tax year or years until ithey are used up. In this case, I also recommend you get yourself another investment adviser.
Other considerations: Of course, we're talking taxes, so it's not as easy as 1 minus 3 equaling a loss of 2.
You have to know your basis, both original and adjusted, to count against your profit. You also might need to consider wash sale rules and the kiddie tax, as well as your overall tax rate.
But in most cases, it's not rocket science math. And some extra computations are worth it when they lower your tax liability.
- Taking the sting out of stock losses at tax-filing time
- Capital gains tax: past, present and future
- Dividend tax possibilities
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