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TEXT OF INTERVIEW
Tess Vigeland: You’ve got exactly two weeks to get your finances in order, at least when it comes to what you’ll end up paying Uncle Sam. Dec. 31 is fast approaching, so we’ve brought in Tom Herman, tax columnist for the Wall Street Journal, to give us a few helpful hints on reducing the tax bite. Hello Tom.
Tom Herman: Thanks Tess. Good to be with you.
Vigeland: You know, so many people have lost so much money this year. Do you think there’s any chance the IRS might just say, oh that’s alright, keep your money?
Herman: No, I don’t think so. That’s one of the few predictions — I feel very comfortable making that prediction. But there is still plenty of time to take some steps to cut your taxes without having the IRS do anything differently than they have in the past.
Vigeland: Alright. Well let’s talk about that. What kinds of year-end strategies should they be employing to get at least a little help from Uncle Sam?
Herman: Take a look at what’s left of your investments in your taxable accounts; take a look in particular at the investments that have gone down in that. If you were thinking of selling any of those anyway, now is a good time to consider pulling the trigger. You can use your losses to offset the gains on a dollar for dollar basis and there is no limit on that. But there is one other very important rule that a lot of readers I’ve found do not know about: suppose your losses are even bigger than your gain, you can sell those losers and deduct up to $3,000 of your net losses each year from your wages and other ordinary income. And that’s why a lot of investors I know who have big losses are arranging their affairs right now — so they have a $3,000 net loss and therefore can reduce their taxes for 2008.
Vigeland: Here’s another very complicated twist that I wonder if you could help us sort through this: I have been reading that with some mutual funds, you could actually find yourself subject to capital gains, even if you’re taken big hits.
Herman: Absolutely. And this amazes investors when they find this out. You could have invested in a mutual fund that’s down 40 or 50 percent this year and you could still get a capital gains distribution from that fund, and a lot of people can’t figure out why that is.
Vigeland: I’m among them, so help us out.
Herman: The basic reason is that a lot of mutual funds sold stocks much earlier in the year when prices were much higher, because they wanted to move to a different type of stock or they just thought that stock was heading down. So they have these built-in capital gains and they didn’t want to sell later, so maybe they have capital gains distributions that they’re paying out. Mutual funds are required by law to make these capital gains distributions.
Vigeland: And what we’re talking about here is taxable accounts, right? This does not affect 401(k)s, IRAs, that sort of thing?
Herman: Absolutely. This is only for your taxable accounts. And I should have mentioned earlier that you can’t deduct losses in your retirement accounts; these are only for taxable accounts.
Vigeland: Is there any relief for the hundreds of thousands of people who have watched their property valued plummet? Anything in the tax code that can help those folks?
Herman: Unfortunately you cannot take a loss on the sale of your home. That surprises a lot of people; a lot of people think of their home as their primary investment, but that does not count. That capital loss I told you about — the $3,000 a year in most cases — that’s on securities. It does not count your primary residence I’m afraid.
Vigeland: Tom Herman is the tax columnist for the Wall Street Journal. Thanks so much for coming in and happy holidays!
Herman: Thanks Tess. You too.
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