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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
It’s not too late to turn 2008 losses into tax savings
THIS COLUMN of late has been all about looking on the bright side during these turbulent economic times.
One recent column touched on the drop in oil prices, and how that’s created an economic stimulus by lowering prices at the pump. Another addressed how lower stock prices give investors practicing dollar-cost averaging the opportunity to buy more shares at lower prices.
I’ll continue that theme this week, with a look at how investors can turn stock portfolio losses into tax savings by selling some losers before 2008 ends.
Of course, taxes are just one consideration when deciding whether to sell a stock. It probably doesn’t make a lot of sense to sell a stock that’s vastly undervalued just to save on taxes–and then watch as the stock bounces back.
But "harvesting" capital losses in your portfolio by selling stocks that have lost value since you bought them can sometimes make sense. Losses can offset capital gains and sometimes also ordinary income.
Below are some specific ways that the U.S. tax code can be used to save money. Thanks to Denise Short, a certified public accountant and tax manager at PBGH’s Fredericksburg office on Jackson Street, for her help with this list.
- Gains or losses on stocks held less than a year are considered short-term and are taxed as ordinary income. Realized gains on stocks held for more than a year are considered long-term and for most people are taxed at 15 percent.
- If you have short- or long-term gains, you can offset them by selling stocks for a loss.
- Short-term net losses can be used to offset long-term net gains. Long-term net losses can be used to offset short-term net gains. You can use those rules to eliminate all capital gains exposure.
- If net losses exceed net gains, you can use up to $3,000 to offset other forms of ordinary income. Losses of more than $3,000 can be carried forward to future tax years. There is no time limit on this for individuals.
- Investors who want to sell for a loss for tax purposes but keep the stock can "double-down." For example say you have 100 shares of General Electric that are trading for far lower than where you bought them. You want to lower your tax bill, but you believe GE will rebound. One option is to buy another 100 shares, wait at least 30 days, and then sell the original 100 shares at a loss. Then you still have the 100 shares, but you’ve also locked in some losses.
- If you use that strategy, be sure to wait the full 30 days. Otherwise you’ll violate the IRS’ "wash rule" and won’t be able to capture the loss for tax purposes. Of course this strategy is not foolproof, as the second lot of shares could also lose money. Or the shares could climb back to your original purchase price before the 30-day period ends, thereby eliminating the possibility for realized losses.
- People interested in following this strategy need to purchase the new stock within the next few weeks to give themselves time to sell the original shares before 2008 ends. Another alternative is to sell the shares and then wait 30 days to buy the stock again.
These are among the topics that the Virginia Society of Certified Public Accountants discusses on its Web site–financialfitness.org. The American Institute of Certified Public Accountants also has a good Web site–360financialliteracy.org.