A Reason to Cut the Cord on Portfolio Losers Before 2015

Here’s your last tax tip from me for the year: Cut the cord.


While it applies to most things in life, I’m referring to the losers in your investment portfolio.

The S&P 500 is up about 8% this year. And that’s great news.  But if you sold any of those winners, you owe Uncle Sam capital gains tax.  That’s bad news.

So, consider selling some losers before January 1 to offset your tax bill. Look, no one wants to admit to a bad investment, but sometimes, you just have to cut the cord. And that separation will help your tax bill in April.

Losses from any stock, bond or mutual fund can be used to offset any gains from the same.  So you can essentially wipe out your capital gains bill, if you have an equivalent amount of capital losers.

The good news is you can still report an extra $3,000 of losses on your 2014 Form 1040.  (It’s only $1,500 for married couples filing separately).

Any losses you can't use to offset gains this year can be carried over into future tax years.

So, let’s say you had a great year and sold some stock to pay for your daughter’s wedding.  You generated $10,000 of capital gains in the process.  But you were able to scrape up (or admit to) $15,000 in losses. (High time you sold your over-weighted energy positions anyway.)

So now you have a net $5,000 in losses.

Well Uncle Sam only allows you to take $3,000 on this year’s tax return, which will offset your taxable income.  So the remaining $2,000 can be carried over to next yet to again be offset against some gains.

High-earners will benefit the most from selling their losers, thanks to that annoying 3.8% surtax on net investment income, which could bring their long-term capital gains rate to 23.8% and short-term gains rate to 43.4%.

That’s nuts.

So it’s really worth admitting defeat every now and then.

And don’t get fancy.  If you have a favorite stock that’s down, and you’re thinking you can sell it today to generate the loss and just buy it right back at the lower price, think again.

Uncle Sam is totally on to you.

The tax geeks call it the wash sale rule – and it disallows your master plan.  It says that if you sell a stock at a loss you have to wait a minimum of 30 days to buy it back.  No same-day buying and selling in the same loser security.

And don’t forget, capital gains taxes only apply to investments held in taxable accounts – no worries about your trades in individual retirement accounts or 401(k)s.

And there it is. Your last tax tip of the year. We’ll start up again in the New Year, so email me your questions at tracytaxtips@gmail.com.

And now you can  go back to being all stressed out over the holidays.  (Did you know “stressed” is just “desserts” spelled backwards? Just sayin…)

Happy holidays.