Bob O'Brien
Head Instructor
bobrien@mywealth.com
Tax harvesting is a small silver lining in a year like 2008 for most investors. It allows you to take advantage of the poor performance of investments for tax purposes.
Here is how it works: Let’s assume you purchase XYZ mutual fund a few years ago with $10,000.00 (not part of an IRA/401k or any other tax favored vehicle) and the fund is now worth $6,000.00. If you where to sell this investment before the end of 2008 you would be able to take a loss for tax purposes in 2008. This loss could be used to offset a capital gain in the year, a loss against ordinary income up to $3000.00 or be harvested to offset future capital gains.
In the example I mentioned above, assume you had no realized investment gains in the year, you would be able to take a loss of $3000.00 against ordinary income and harvest $1000.00 loss for the future. It gets harvested on Schedule D of your 1040, line 6 for Short Term Losses and Line 14 for Long Term Losses here is a link to see for yourself: http://www.irs.gov/pub/irs-pdf/f1040sd.pdf
As a former tax preparer, I have seen people with $100k or more in losses stored to offset future gains. As you can see on the form it is referred to as carryover, from past losses. The IRS does not refer to this as tax harvesting, because they have a rule set in place, to keep people from abusing carryovers. It is called the wash sale rule. Basically, this rule states that you must stay out of the investment for 31 days. Otherwise you cannot benefit from the loss and carryover over the loss. Make sure you stay out of the investment for 31 days and /or an investment that is substantially identical to that investment and you are fine. If the investment did shoot up, in the 31 day period it would limit the strategies effectiveness. If it did poorly it would create even more savings.
Another strategy is gain harvesting. This year with the Democratic Party having a majority in Washington a lot of investors are worried that the capital gains rate will go up this year, and they are selling now to make certain that get the !5 % rate. I would be careful with this speculation, President-elect Obama has seemed pretty practical and although I think in an ordinary economy he wouldn’t mind raising some rates, with the markets and economy so fragile he may wait until they go up on their own. The rate is currently scheduled to increase to 20% in 2011. Here is a link to the changes and when:
Remember taxes for many of us is the largest expense in our lives, and the better you understand your taxes the less you will pay within the confines of the law. You don’t want to over pay and you don’t want to under pay.
For more great strategies like these check out our courses at www.mywealth.com
Bob O’Brien
Sr. Instructor
