It’s harvest time –for most of us that conjures thoughts of picking apples and nuts, but if you are an investor, the final months of the year are the time to harvest investment losses to offset capital gains and minimize income taxes. It will take a little effort, but you’ll thank yourself come tax time. Here’s where to start.
Compute the gains on assets you’ve already sold
Make a list of your sales of stocks, bonds and real estate during the year, and add expected capital gain dividends on mutual funds.
Offset any losses you have already realized this year
That includes the stock you purchased when it was high and you thought it would go higher, but you finally sold when it dropped well below what you paid for it. Don’t forget loss carryovers from prior years – you can spot carryovers on page 2 of last year’s Schedule D of your personal income tax return.
If the gains exceed the losses, look for unrealized losses to offset those gains
You may be holding onto a stock that has dropped, hoping it will regain its value. This would be a good time to sell the stock and put that loss to work. Another place to seek unrealized losses is in your bond portfolio – these last few years have been very tough for bond investors.
Beware of the wash sale rule
If you sell at a loss, you can’t buy the identical asset back again for 31 days. To avoid the wash sale rule you could double up on the stock initially, and then sell half 31 days later. For example, if you own 100 shares of XYZ Corp, you can buy 100 more shares at the current bargain price, hold those shares for 31 days, and then sell your original 100 shares at a loss. You’ll still own 100 shares of XYZ, and have realized a tax loss to boot.
Don’t harvest too many losses
Once you have offset your losses against your gains, excess losses can reduce up to $3,000 of ordinary income from employment or other sources. If your losses are greater than that, the excess can’t be used this year, and must be carried over to the next year.
If all of this seems terribly complicated and makes your eyes glaze over, don’t ignore the issue and just walk away — you’ll regret it at tax time. Pick up the phone and call your accountant to make an appointment for some tax planning advice.