The autumn's juicy apples and fresh squash will soon give way to the stale processed foods of winter. And just as people like to pick what produce remains as the agricultural season ends, investors may want to "harvest" their stock market losses as the calendar year closes.
Here's the deal: Any taxpayer in any tax bracket may deduct stock market losses of up to $3,000 against his or her ordinary income. In other words, if you've sold stocks at a loss of $3,000 this year, that same amount of your total earnings becomes exempt from taxation. The higher your tax bracket, the more money you save by harvesting losses. Someone taxed at 33% would save $1,000 while someone taxed at 25% would save $750.
"We certainly take losses whenever we can," says Mary A. Malgoire, president of The Family Firm, a financial advisory in Bethesda, Md. "The point is that the loss, when you translate it into $3,000 increments for tax deductions, becomes a benefit for you."
In addition to enabling this deduction against ordinary income, the harvest of losses can be used to offset capital gains. While the former is limited to $3,000 per year against ordinary income, the latter isn't capped. On your tax forms, you need only report net income from buying and selling securities, plus dividends. So if you've done some profit-taking this year, consider harvesting some losses as well.
"If you've got stocks carrying losses that you're holding long-term, and if you've sold stocks for short-term gains, the best thing to do would be to sell the losses to offset the short-term gains," recommends Stewart Robinson, partner with KBL LLP, a New York-based certified public accounting firm. "There's no limit to the capital losses you can count against capital gains."
If you don't have any losses on the books for 2009, it's not too late to join the party. Though the Standard & Poor's 500 Index will undoubtedly finish the year in positive territory, it's a long way from the all-time highs it reached in 2007. And chances are that you've still got some harvestable duds in your portfolio.
Even if you aren't in the red on any of your investments, you may be in luck. Losses harvested in previous years carry over. If you sold stocks at a loss of $6,000 last year and deducted the $3,000 against ordinary income, you can deduct the remaining $3,000 in losses this year. You can carry over an unlimited amount of losses indefinitely to offset capital gains from year to year. And, excluding the $3,000 you must deduct each year against ordinary income, you can continue to carry over capital losses until you have enough gains to offset them.
Perhaps the best part of harvesting losses is that you can always buy back any under-performing securities that you think will rebound. Though you must wait 30 days before re-purchasing securities if you intend to declare the loss on your taxes, you don't have to wait if you choose to simply buy similar securities.
"It makes sense for people who own an S&P index fund to just sell one and buy another," says Malgoire. "You don't want to be out of the market for too long -- you want to sell something today and buy something tomorrow."
Saving $1,000 on your taxes in the meantime is a nice bonus.
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