DeFreitas & Minsky Accounting Blog

Tax Tip: Harvesting Capital Losses

Posted by admin on Jan 7, 2014 12:11:18 PM

capital losses

Investors in the 2014 market are far more optimistic than five years ago, when the stock market crashed in 2009. At that time, people throughout the entire world were suffering from the loss of the falling asset values. Currently, the economy appears to be on a steady incline, as real estate prices have stabilized in many areas around the country, and major stock market indexes have climbed to the brink of record levels.

As we all know, there’s a lot to be learned from history, and when it comes to the economy, investors can learn plenty from past market activity. This century has witnessed two significant stock market crashes so far, and there are sure to be others further down the road. Knowing the tax codes, and what you’re allowed to do to best protect your money, is an important part of investing safely. This way you’re able to take advantage when the market reaches its peaks, and protect yourself when it dips.

Harvesting Capital Losses

Sometimes when a stock or investment falls under the value a person originally paid for it, the individual feels that it’s best to hang onto it in hopes that it’ll recover. However, sometimes it’s best to cut your losses when it comes to investments, otherwise known as “harvesting” your capital losses.

Capital losses can be written off of your tax returns for that year (for a maximum of $3,000), which means that you can make up some of your loss by deducting those taxes. If you held onto the depleted-value stock, and it bottomed out and never recovered, you would be at an even greater loss. Oftentimes, an individual’s investment decisions are time-sensitive, and depending on your age and financial circumstances, your ability to hold out on risky wagers may vary.

In addition to the tax deduction, capital losses can reduce your adjusted gross income (AGI). Depending on your AGI, and how close you are to the dividing line between tax brackets, a $3,000 loss may be enough to enter you into a lower tax bracket. In that case, you’ll be paying less in taxes overall, which can mean serious savings.

Check back with us next week to learn more tax tips to keep in mind in the New Year!

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Topics: Tax Laws

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