Don't Mess With Taxes

What was that terrible noise? Oh, it was some of the holdings in your portfolio crashing.

So sorry. But you're not alone. Even in good times, we all make some investment moves that don't pan out as we had expected or hoped.

Donder (or Donner or Dunder in various Santa sleigh reports), the reindeer who knows all about loud and terrifying noise since his name means thunder, says you shouldn't be too upset about the sound of your shattered financial holdings.

"Did you hear that?" courtesy Point Counter-Point Point Point blog

They could turn out to be worthwhile at tax filing time, notes Donder, if you follow the seventh Reindeer Year-end Tax Games Tip of 2012: Harvest your investment losses.

Losers can help reduce taxes: If you were able to lock in some capital gains this year to, as fellow sleigh-mate Prancer earlier recommended, take advantage of the 15 percent tax rate in case it goes up next year, good for you.

But just because the tax rate is low is no reason to pay it.

You can use the negative amounts from those unwanted capital losses to offset your gains. That strategy, notes Donder, is known as tax harvesting.

What if you didn't take any capital gains this year? You still can use the losses to reduce your other earnings.

You can claim up to $3,000 a year in capital losses against your ordinary income. This will help lower your total income. And less money generally means a smaller tax bill.

If you have more than $3,000 in losses, you can carry the excess forward to future tax years. There you can offset future capital gains or again claim the losses in three grand a year chunks against ordinary income.

Of course, losing money on investments is never your goal.

So if a down arrow made regular appearances on your personal investment chart, then you probably should have a heart-to-heart with your money manager. Then have a good long talk with your new financial adviser.

But don't despair too much if investment losses are occasional occurrences. Just be sure to take tax advantage of them!

• Taking the sting out of stock losses at tax-filing time
• Capital loss deduction increase proposed
• Capital gains tax: past, present and future