EOY Advice for Tax Sales?

[roger r]

Last year I sold off a fair chunk of stock, taking losses that could carry over for several years. This year I have unrealized capital gains that could actually wipe out much of the carry over losses, should I choose to sell. I'm not sure if I'm seeing a clear choice of what to do and would appreciate any suggestions and explanations.

I would have to review the rules on this, but would intend to replace the stocks I could sell after the proper waiting period (30 days I think it is) or replace them with similar, but not the same, fairly immediately. I don't anticipate my income or general tax situation to change much over the next couple of years. (I also read the earlier thread about a possible increase in capital gains tax in 2011 with some interest).

 

[LOL!]

The rules are simple: Sell your losers and keep increasing your carryover losses. There is no need to sell winners just because you have carryover losses.

Later in retirement, you can sell your funds (all will have gains because you have sold your losers diligently every year before that) for living expenses and owe no taxes because of your carryover losses. Since you will owe no taxes, you will be able to convert some of your tax-sheltered accounts to a Roth IRA at a very low tax rate.

Your carryover losses will be even more valuable if the cap gains tax rate goes up.

 

[FUEGO]

This year may present a unique opportunity. Long term capital gains tax rate is 0% for those in the 15% bracket and lower during 2009 and 2010. So it may actually be beneficial to take some tax gains now. Significant state taxes may counteract or kill any potential benefit since the LTCG's will still incur state income tax liability (at least in my jurisdiction).

Caveat - I haven't actually ran the numbers, but it seems like a "free lunch" up to the point you exhaust your 15% bracket. Not sure how losing all those tax losses comes into the equation since those can offset ordinary income at a rate of $3000 a year. So do your own due diligence.

 

[kaneohe]

I tend to agree w/ LOL. If OP doesn't sell, the carryover losses can offset ordinary income at ordinary income rates which are higher than capital gains (although only $3000 can be used each yr for that purpose). If OP sells, the carryover losses offsets the capital gains instead.

If ordinary rate is 15% and CG rate is 0%, net benefit is $450 when $3000 of losses is used. The net benefit is even higher if more losses are involved. Best to use tax software or a tax calculator (google for tax calculator 2009 and pick Turbotax).

 

[FinanceGeek]

I agree with LOL! with one exception - carryover losses do not always benefit a surviving spouse if one passes away, the exact treatment depends on whether one is in a community property state, whether the asset that generated the losses was jointly owned, etc. And, carry forward losses do not pass to one's estate or inheritors, they could only be used by the executor filing one's final return.

The moral being, it isn't always optimal to blindly carry forward capital losses forever!

 

[roger r]

I think I just had an "aha" moment. Thanks for the thoughts! That helps.