|
Answer:
Dear
BuyandHolder,
Yes...you
can trim your tax bill by selling losing stocks. The
strategy is actually fairly simple.
You
look over your portfolio and note those stocks that
have fallen in price since you purchased them. Study
each one carefully to determine if it may move up
in price or continue to decline. Then, make a list
of those that seem unlikely to recover.
When
you sell your losers you generate tax losses than
can offset any gains you've taken (or plan to take
within the calendar year).
Capital
losses are first used to offset capital gains. But
what if it turns out at the end of the year there
are no capital gains, or if you have more losses than
gains? Well, the IRS, in an uncharacteristic ruling
of kindness, allows you to deduct the loss against
your other income -- up to $3,000 in one year. If
your capital loss is more than the $3,000 cap, you
can carry any amount of that loss into the next year.
Caution:
To claim a loss on your tax return, you cannot buy
back a security for at least 31 days. So don't think
you can sell your losers, take the loss on your tax
return and then immediately buy back those same shares.
Under
the wash sale rules, if you sell a stock for
a loss and buy it back within the 30-day period before
or after the loss-sale date, the loss cannot
be claimed for tax purposes.
A
word of advice...
If
this is all new to you, I recommend that you check
with your accountant or tax preparer. Once he/she
walks you through the process, you'll find it's not
as complicated as it sounds. What is more complicated,
of course, is determining which stocks may be true
losers!
Capital
Gains
While
we're on the topic of gains and losses, I want to
remind you of the advantage of holding securities
long-term, that is, for at least a year and
a day. If you sell after a year and a day, you're
entitled to the favorable capital gain rate. Usually,
that rate is 15% or, if the gain falls in a tax bracket
below 25%, then it's only 5%. (There are some exceptions
for certain types of assets.)
On
the other hand, if you sell a security before a year
and a day has passed, this is considered a short-term
sale and you'll be taxed at your regular tax rate,
which could be as high as 35%. (For 2005, the tax
rates are: 10%, 15%, 25%, 28%, 33% or 35%.)
Good
luck!
|
