Winning With Losers
Unloading a losing investment before year-end will allow you to offset taxable gains or other income.
It’s been a good year for the stock market overall, but if you’re like most investors, you still have some losers lurking in your portfolio. Selling those investments could sop up investment gains and lock in some tax-free profits.
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. For most investors, long-term capital gains are taxed at 15%, but high-income investors may pay up to 23.8%. (If you're in the 10% or 15% income-tax bracket, you'll pay zero tax on your 2013 capital gains.). Sell that same asset at a loss and it's a long-term capital loss, which can offset capital gains dollar for dollar. So review your portfolio for dogs you might want to dump and winners you might want to cash in before year-end.
If you sell some assets at a loss, you first must use your capital losses to offset capital gains, if any. After that, you can use up to $3,000 of excess losses to offset other kinds of income, such as your salary or IRA distributions.
Ironically, that means excess losses are extra valuable. Instead of offsetting long-term gains that would be taxed at a maximum 23.8% this year, for example, they can offset income in your top tax bracket -- as high as 39.6%. Excess losses can be carried over to the following year. (Don't forget to check last year's tax return to see whether you reported excess losses that can be carried forward to 2013.)
One word of caution: This strategy applies only to your taxable investment accounts, not your tax-deferred retirement accounts, such as IRAs and 401(k) plans.