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'Tis the season to harvest your tax losses

Posted: September 24, 2008 8:39 p.m.
Updated: November 26, 2008 5:00 a.m.
 

While the economic reasons for buying and selling in the stock market are critical, strategies to minimize your tax burden must also be considered.

A year-end review of your portfolio could be accomplished, while simultaneously looking out for some tax strategies.

Gain/loss strategies
Long-term capital gains under the current tax law. The holding period is more than 12 months to be eligible for the 5 percent to 15 percent depending on your tax bracket. Securities held less than 12 months are subject to ordinary tax rates up to 35 percent.

Worthless securities are deductible only in the year they become worthless. The IRS keeps a list of companies whose stock has become worthless during the year.

If the company isn't on the list, the IRS will not accept your deductions, unless you can otherwise prove worthlessness.

Capital losses can be deducted only up to $3,000 or your other income, so there is no immediate advantage in realizing more than the $3,000 amount.

Capital losses can be used to offset capital gains. So if you have unrealized losses sitting in your portfolio, you might consider realizing them to minimize your capital gains.

A word of caution is that if you sell securities for the purpose of creating a loss, don't purchase identical stock or bonds for 30 days before and 30 days after the date of the sale.

This is called a "wash sale." The "wash-sale" rule disallows the recognition of your loss if you make an identical stock or bond purchase within this time limit. The "wash sale" rules don't apply to stock sold at a profit.

As a reminder paper losses are just that, until the stock is sold no loss can be reported on your tax return.

Advantage investing
Other investments to consider are those that do not give rise to tax liability. Municipal bonds are exempt from federal tax, and in some cases, from state and local taxes as well.

A California municipal bond is not taxable on your state return. Non-California bonds are taxable on the California return.

Series EE and I savings bonds are exempt from state taxes. The interest earned on these bonds can be taxed on your federal return in one of four ways. You get to decide, which will enable you to pay less in taxes.

You can pay tax on the interest as it is earned every year, even though you haven't received it yet.

You can defer paying tax on all the interest earned throughout the years until you cash in the bond at maturity.

You can wait beyond maturity and pay tax on all the accumulated interest when you cash in the bond.
You can convert the EE bond at maturity to a series HH saving bond.

The interest earned on the EE bond remains tax deferred until you cash in the HH bond. However, HH bonds pay out interest annually to the owner. You must pay tax on this interest each year.

Collectibles
Long-term investments in collectibles are taxed at a flat 28 percent. Short-term investments in collectibles are taxed as short-term capital gains at your ordinary income tax rates.

Retirement accounts
Gains and/or losses in retirement accounts are not subject to the capital gains rates. Only income from distributions are taxed at your ordinary tax rate.

Losses are not deductible. Before making changes in your retirement accounts, please consult with your financial adviser.

Although we are facing uncertainty in the stock market this fall, one thing for sure is facing the reality of your tax situation come next spring.

Julie M. Sturgeon is a certified public accountant in Valencia, specializing in individual and business tax issues. "It's Your Money" appears Thursdays and rotates between a handful of the valley's financial professionals. Her column represents her own views, and not necessarily those of The Signal.

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