Investor's Business Daily
Just 17 More Shopping Days For Capital Losses
Friday December 6, 11:00 am ET
By Paul Katzeff
Like most investors, you're probably licking your investment wounds. Over the past three years you've likely suffered frustrating losses in stocks or stock funds.
But those setbacks may have a silver lining.
ADVERTISEMENT
[Get 10 FREE Issues of Investor's Business Daily.]
You may be able to use those losses to cut your tax bill. That happens when you subtract losses from capital gains and other eligible income. The result is less taxable income.
A Real Loss
Your first step is to bite the bullet. If you haven't already, sell the loser. You can't take a deduction for stock, bond or fund shares that have merely fallen in value.
Short term is one year or less.
If you're aiming for long-term status, don't pull the trigger on a sale one day too soon. "Anything you've owned one year and a day, or longer, is long term," said Rande Spiegelman, vice president for financial planning at Schwab Center for Investment Research.
The two rates have different tax consequences.
Short-term gains are taxed at ordinary marginal tax rates. They go as high as 38.6% for 2002.
Long-term rates are generally lower. Chances are, your marginal tax bracket is higher than 15%. Uncle Sam takes a 20% bite from your gains.
But if your marginal rate is 15% or less, your gains are hit with a 10% tax bill.
"There's an added twist to this," Spiegelman said.
Special Tax Break
That twist concerns a special tax break. For taxpayers whose marginal tax bracket is higher than 15%, the cap-gains tax bite is cut to 18% from 20% if they satisfy two requirements.
First, they must have owned a security more than five years. Second, they must have purchased it after Dec. 31, 2000.
"You can't use the 18% rate until 2006, so you'll have held the security more than five years," Spiegelman said.
For taxpayers in the 15% bracket or below, the cap-gains rate is only 8%. It doesn't matter when they bought it, as long as they hold it at least five years, says Mark Luscombe, tax analyst for tax research firm CCH.
Even if you're above the 15% bracket, Spiegelman suggests giving the securities to one or more of your kids.
You and your spouse can gift each child a total of $22,000 a year in securities. The worth is based on fair market value the day of the gift.
Children over age 14 are taxed at own rate. They typically fall into the 15% bracket or lower.
Because of that, their long-term gains get taxed only at 8%. They can use their parents' cost basis. And they can add their parents' holding period to their own for purposes of satisfying the five-year-ownership need.
After checking your buy and sell dates to determine whether your loss is short- or long-term, it's time to see what gains you can offset.
"This involves the netting or ordering rule," Spiegelman said. "You offset like-kind gains first."
In other words, first you apply long-term losses to long-term gains. If the dollar amount of losses exceeds your gains, then you can neutralize short-term gains.
If you still have losses left after offsetting short-term gains too, you can use up to $3,000 of them to wipe out ordinary taxable income like wages, dividends and interest. Marrieds filing separately can offset only up to $1,500.
In a tough market like this year's, you may still have more losses.
They won't go to waste. You can carry them forward. You're allowed to use up to $3,000 each year to lower taxable income. You can keep doing that until all of your losses have been accounted for.
Did you have losses in prior years that you didn't put on your tax returns? You can use prior-year losses to offset income by filing an amended return. You can reach back as far as three years, Spiegelman says.
Better yet, you can include transaction costs. "Trading commissions and fees can be capitalized and added to the cost basis when you purchased stock," Spiegelman said. |
