Capture Stock-Market Losses
Many Americans saw their investment accounts fall 40% when the stock market tanked. The sticker shock was overwhelming for many and they stopped checking in on their accounts, hoping that if they hung on they'd never have to lock in those losses. But from a tax perspective, it might be wise to bite the bullet and take the losses now on stocks that haven't bounced back. In what's often called tax loss harvesting, investors can sell assets that have generated large losses in after-tax accounts and use those losses to offset taxable income or even future gains. The losses can be used to offset capital gains as well as up to $3,000 of regular income each year. Any amount exceeding the $3,000 threshold can be carried forward to offset gains in the following year.
"If you had $60,000 in capital losses, you couldn't just use that to wipe out [regular] wages," says Chad Terry, director of retirement solutions at the Principal Financial Group. However, "you can carry it forward indefinitely to offset future gains."
For people who still like the decimated stock that they just sold, no problem. IRS rules allow an investor to buy the asset back after 31 days — and still claim the tax loss.
Following the asset sale, Terry recommends that clients reinvest — sometimes in the same sector and sometimes in a different one, depending on the investment strategy. He doesn't recommend the money be kept on the sidelines unless the sale was specifically done to give the client cash.
See tax moves to make before the year's end:
Introduction: Tax-Saving Tactics
Donate — and Deduct!
Gather Receipts — They're Precious
Reach for the Medical Deduction
Go Green for Tax Breaks
Prepare to Convert to a Roth IRA