Capital loss ‘harvesting’ in 2013
January 1, 2014
The tax break (deduction) for capital losses is available to all investors, not just Mitt Romney and Michael Bloomberg.
Losses from one investment can be used to offset gains on other investments. A loss on the sale of stock can be applied against gains on the sale of real estate for example.
However, only $3,000 of capital losses can be used to offset income from wages, interest and dividends, rental profits and other ordinary income. Any unused capital losses carryover to the next year's return.
Losses are not deductible if you sell and buy back the identical item 30 days before or after selling an item at a loss. That's called the "wash sale" rule. Sales at a gain or profit are not subject to the wash sale rules. You can sell a stock at a small gain and buy back the identical stock the next day. You will have a higher purchase price (cost or tax basis) to offset future sales.
A special benefit of long term capital gains exists for "low income" taxpayers. If your total taxable income is low enough that you don't exceed the 15 percent income tax rate, the long term capital gains and qualified dividends are not taxed at all — a zero tax rate applies.
If you have some capital losses (realized in 2013 and/or carried over from 2012) so your net long term capital gains are low enough to keep you in the 15 percent income tax bracket, you may find those long term gains escape taxation on your form 1040.
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There is a difference between short term capital losses and long term capital losses.
Individual taxpayers with a short term capital loss carryover first offsets short term capital gains. If there are excess short term capital losses (more losses than gains), the excess then offsets long term capital gains. If there is still an excess of capital losses, then up to $3,000 is claimed on the front page of form 1040 and it offsets other taxable income.
Maybe now is a good time to look at your holdings and see if you own a stock that has current value that is less than your cost (tax basis). If you still believe in that stock, you might sell it, wait 31 days and buy it back. The loss can save you some taxes.
That also means you need to do a quick projection of what your 2013 return might look like. Will you still be in the 15% tax bracket or not?
You have every right to organize your finances under the laws to reduce your taxes.
Recognizing capital losses before the year is over may be a benefit to consider.
Did you hear? "Never put off until tomorrow a kindness you can do today."
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Co. CPAs.