Balancing investment losses and gains with taxes in mind

You may be wondering whether its time to realize some of the losses and gains on your portfolio holdings. While I don't think any investment decision should be made on the basis of taxes alone, you should be aware of current tax law, which may help you cover some of your losses.

When you sell securities, losses can be used to offset capital gains. If your capital losses exceed your capital gains this year, you may deduct up to $3,000 of the remaining net loss from your ordinary income. Capital losses greater than $3,000 may be carried over to future tax years, until fully utilized.

Keep in mind that in 2008, different rates could apply to long-term capital gains. Your tax professional can explain which rates apply in your situation.

With a new president, changes in tax legislation could occur for 2009. I recommend you contact your tax advisor before year-end to review any possible tax law changes that might affect your year-end planning.

Unemployment claims have jumped to their highest level in seven years due primarily to the impact of a slowing economy. If you suddenly find yourself out of work, or if your compensation has been reduced, you could be in a much lower tax bracket this year. If your 2008 adjusted gross income is below $32,550 (single) or $65,100 (married filing jointly), you may be eligible for the new 0 percent long-term capital gains rate that applies to the lowest two tax brackets. If so, I would consider cashing in on some of the long-term gains you might have on your investments, particularly if you own low-basis company stock you'd like to diversify. If you are retired with low income, you might also qualify for the 0 percent long-term capital gains tax rate.

If you are providing financial support for your parents who may be in the bottom tax brackets, I suggest gifting appreciated securities instead of cash. Your parents can then sell these securities without capital gains tax. For 2008, you may gift up to $12,000 a year per recipient without paying gift tax; married couples can give up to $24,000 a year per recipient.

Should you decide to sell depreciated securities, be aware of the wash sale rule. A wash sale occurs when you sell stock at a loss and buy "substantially identical" replacement stock (including options on the stock or purchases within an IRA) within 30 days before or after the sale. You may not deduct losses from a wash sale.

Several tax deductions scheduled to expire were recently extended as part of the Emergency Economic Stabilization legislation that passed on Oct. 3. I suggest you ask your tax advisor if you qualify for any deductions for qualified tuition payments, real estate taxes and other expenses that may affect your 2008 tax situation. It's to my understanding that in some cases, these deductions may be taken even if you don't itemize. Ask if any prepayments of these expenses for 2009 before year-end might be advantageous.

- For more information, please contact your tax advisor or call me at 689-8704 or


Use the comment form below to begin a discussion about this content.

Sign in to comment