M is for Money

If you’ve got money invested in the market, I bet you’ve got a few losers in your portfolio right now. Did you know you can deduct those losses on your taxes? There are two criteria to meet before you can deduct stock or mutual fund losses:

1. Stock or fund must be held in a taxable account, IRA’s and 401k’s don’t count
2. You must sell the shares this year to ‘realize’ the loss, you can’t deduct paper losses

Also, for shares you’ve held for a long time, make sure it’s truly a loss before selling for tax purposes. Some funds may be down this year, but still in positive territory over a longer period.

The Taxman

You can use market losses to offset any amount of realized gains. Again, you must sell this year to take advantage of this, paper gains don’t count. You can use this to help avoid taxes when rebalancing a portfolio, sell some winners and some losers. If you don’t have any gains to offset the losses that’s OK, you can then deduct them against your income. You are limited to a $3,000 write off against income per year, but you can carry over this year’s losses to subsequent years. Say you have a $5,000 loss you want to deduct, you would deduct $3,000 this year and $2,000 next year. I plan to deduct the losses from yesterday’s Sharebuilder sale, it’s a small consolation.
Thinking of Selling?

If you’re thinking of selling losing mutual fund shares, now is the time to do it. In addition to being able to deduct your losses, many mutual funds distribute dividends and capital gains at the end of the year. Those dividends and capital gains are taxable this year, sell before they are distributed and you avoid that additional tax bite. Experts are predicting a big year for distributions, despite heavy market losses. Large share redemptions have forced fund managers to sell holdings, this generates capital gains that by law must be passed on to shareholders. Lose money and owe taxes, isn’t investing fun!

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