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Leslie Daff, JD, MBA - Orange County Estate Planning Lawyer

Friday, December 16, 2011

Tax & Estate Planning Tip #1: 'Tis the Season to Harvest Tax Losses

This month many financial advisers are searching their clients’ stock and bond portfolios for investments to sell for the tax benefits, referred to as “tax loss harvesting.”  Before you agree to sell, make sure you will reap the tax savings.  Here are some harvesting tips.

First, an investment should never be sold just for the tax benefits.  It should be sold when it is no longer the optimal investment for personal, market, and economic reasons.

Second, tax harvesting is not simply selling your loss stocks.  The ideal net loss (gains minus losses) is $3,000.  Losses in excess of $3,000 are not usable in the current year.  They are carried forward to next year and possibly for years to come.

Example:  Assume you sold mutual funds during the year for a gain of $10,000.  In your portfolio, you have $40,000 of losses from stocks you are thinking about selling.  From a tax perspective, you should sell only enough of the stock to generate $13,000 of losses.  Then your net loss would be a currently usable $3,000 ($10,000 - $13,000).  If you sell all the loss securities, you will report a net loss of $30,000 ($10,000 - $40,000).  You can use $3,000 of the loss on your 2011 tax return and will carry forward a loss of $27,000 ($30,000 - $3,000).  If you do not have gains to report in the coming years, it may take you until 2020, nine years $27,000/3,000 per year), to fully reap the benefits of your 2011 loss.

Third, if you have capital loss carryovers from prior years, it may be better to sell only appreciated investments.  However, if your 2011 income is low and you are in the 10% or 15% marginal tax rate bracket, there may be no tax generated by the sale of your long-term investments.  In this case, you may not want to sell anything and save your capital loss carryovers for a year it will actually reduce the taxes you owe.

Fourth, wait more than 30 days to reacquire any investment you sold at a loss.  Selling an investment at a loss and repurchasing it within 30 days, called a “wash sale,” cancels the immediate use of the loss.  There is no waiting period for reinvesting in property you sold at a gain.

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