Tax Tips
Winning With Losers
Look on the bright side: Selling a losing asset at this time of year can be a great way to rebalance your portfolio and save on taxes.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 8, 2006
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Try to make some time this weekend to pull out brokerage and mutual fund records and tote up the gains and losses you've realized for the year so far. If you have more gains than losses, search your portfolio for "paper losses" -- investments that have declined in value (since you bought them, not simply from their high-water mark). Unloading a loser before year-end would allow you to offset some of those taxable gains.
One word of caution: This applies only to your taxable investment accounts, not your tax-deferred retirement accounts like IRAs and 401(k) plans.
If you hold an asset for at least a year and a day and sell it at a profit, it's a long-term capital gain taxed at a favorable top rate of 15%. Sell that same asset at a loss, and it's a long-term capital loss, which can offset capital gains dollar for dollar. Plus you can use $3,000 of additional loss to offset other kinds of income, such as your salary. Ironically, that means excess losses are extra valuable. Instead of offsetting long-term gains that would be taxed at 15%, for example, they can offset income in your top tax bracket -- as high as 35%. Excess losses can be carried over to the following year.
What if losses -- including any unused losses carried over from 2005 (check last year's Schedule D) -- exceed your gains so far in 2006? That presents you with the opportunity to cash in some winners without increasing your tax bill. If you want to move some money around in your portfolio or think it's time to pull money out of stocks or funds that have been on a good run, you can sop up gains you score by the losses you've already incurred.
Don't just sell for tax reasons. You don't want to let the "tax tail wag the investment dog." But the possible tax rewards make this the perfect time to take a hard look at your portfolio.