Take Advantage of
Tax Savings from a Down Market
Know When You Have a Deductible Loss
Despite a repressed stock market in the past few years, you don't
necessarily have a deductible loss. As long as you hold an investment, you
only have a "paper" loss. It is when you sell the investment that you have
a transaction to report on your tax return.
The tax law allows you to offset your capital gains by your capital
losses. You can sell both investments that are at a gain and at a loss,
allowing you to avoid or minimize taxable gain by offsetting the two.
However, an investment sold at a loss is not gone forever. If you believe
it was a good long-term investment, you can wait 31 days and buy it back.
This strategy works very well if the price of the investment either stays
the same or goes down further. For example, you sell 100 shares of XYZ
Company, which you purchased for $3,000, and receive $2,500 in cash
proceeds from the sale. You can use the $500 loss to offset capital gains
or other income. Let's assume you want to buy back XYZ stock because it is
a good long-term investment. Wait 31 days so you won't lose the tax
advantage of the $500 loss because of the wash sale rules. If the price of
100 shares of XYZ is $2,500 or less, then you can use the proceeds from
the first sale to buy the stock back without having to provide any
What if you are over age 59 and a half and have IRAs? Are there any
potential tax savings because the stock market is down? This is an
excellent time to take distributions (either voluntary or required) of the
actual investment from your IRA, instead of cash. If you are over age 59
and a half, you escape the additional 10% premature distribution penalty.
Many IRA accounts will allow you to take either cash or the actual
investment, such as stock, instead of cash. If there are investments
within your IRA account that you want to hold long-term, but the value is
currently down, you may want to consider having that investment
distributed to you. Be aware that this is a taxable event and the fair
market value of the investment must be reported on your tax return.
However, any appreciation earned after the distribution will not be
taxable until you sell the investment. This provides several advantages:
1) if you sell the investment, it will be taxed at the lower capital gains
rate, which may be less than the rate for your IRA distribution; 2) it
reduces your IRA account so your required minimum distributions may be
smaller in future years; and 3) you can gift that investment to a person
or charity at a later date.
As always, it is
recommended that you consult your investment and tax advisors prior to
taking any actions.