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 Consider it a way to get an extra little gift for yourself going
into 2015.
It has been such a great year overall for the stock market - the
Standard & Poor's 500 stock index is up more than 11 percent for the
year through December 19 - you might not think there's any point in
looking for losers to sell for tax purposes.
But not every stock or fund is up this year, and it's likely you've
got at least one clunker in your portfolio. Maybe you bought shares
of Exxon Mobil Corp last summer at $104, and watched them fall 13
percent to a recent $91 as oil prices tanked. Or maybe you purchased
Pimco Total Return Fund a few years ago, when manager Bill Gross was
considered the bond king, and didn't sell as the fund's performance
faltered.
While investors don't like to take losses, studies show that selling
losing investments to off-set gains for tax purposes - called
tax-loss harvesting - adds to returns, particularly when done
throughout the year. While so much of investing is subject to the
whims of the market, this is a little piece that's in your control.
At tax time, you'll match the losses against the gains. Then, if the
result after that matching is a net loss, you can take an additional
$3,000 to offset your ordinary income – and carry forward any
remaining loss to future tax years.
"Sometimes people don't want to face the reality that they have a
big loss, but you're not doing yourself a favor by overlooking it,"
says Joseph Perry, partner in charge of tax services at Marcum.
This year, such tax-loss harvesting may be especially important.
After all, given the market's rise, you probably do have gains. And
even if you have not sold any winning investments, if you've
invested in mutual funds, you've got capital gains distributions so
you'll owe capital-gains tax. Given the market's rise this year that
may be higher than you'd expected.
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Consider: Some mutual funds this year have announced distributions
of more than 10 percent of assets, including T. Rowe Price Global
Technology and Vanguard Mid-Cap Growth. If you have $10,000 in a
fund that distributes 10 percent of assets, that's a gain of $1,000.
At the 15 percent long-term capital gains rate, you'd owe $150 in
tax - unless you offset it with an equivalent $1,000 loss.
"If you are looking at your portfolio without [considering]the
mutual fund distributions you might be missing something," says
Perry. "I'm not sure people are focused on that, and it appears that
this year there are more distributions than in the past."
An additional tip: If you're selling for a loss, pay attention to
the so-called wash-sale rule, the tricky Internal Revenue Service
regulation that prohibits you from taking an investment loss if you
buy new shares 30 days before the sale or 30 days after it.
(The opinions expressed here are those of the author, a columnist
for Reuters.)
(Follow us @ReutersMoney or at
http://www.reuters.com/finance/personal-finance Editing by Beth
Pinsker and Andrew Hay)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
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