Question: My portfolio contains some stocks that have cratered -- and I don't expect them to turn around soon in this economy. Might it be beneficial to take a long-term loss on them this year, with an eye toward lowering current taxes and trimming some dead wood? Thanks, Dave, Reston, VA.
Answer: The answer is "yes" to both questions. You will have a lot of company taking capital losses this year, especially with the stock market down about 35% year-to-date. It's also a good time to harvest some dead wood. However, when evaluating investments remember that the underlying fundamentals trump tax strategies.
That said, the capital gain section of the tax code is a fertile area for tax-savvy financial planning. You need to sell in order to get the capital loss or losses, defined as selling an investment at less than the price you bought it for or its adjusted basis. (The expenses you incur selling the investment are deducted from the proceeds and added to the loss.) And, of course, we're looking at stocks, bonds, or other investment in a taxable account. For instance, you can't deduct losses in a tax-deferred retirement savings account, such as a 401(k).
Of course, since we're dealing with taxes the calculation isn't simple. You'll want to familiarize yourself with Schedule D, as well as the differences between short-term and long-term losses and gains. Computer-based programs like Turbotax are helpful or you can hire an accountant to do it for you. If you have a capital loss remaining after offsetting any capital gains you've realized, you can still deduct $3,000 from your income taxes. If the loss is greater than $3,000 you can carry the leftover portion to the following year, and the year after that, and so on.