Published December
2002
Got
investment losses? Make them work for you
If
your investment goals are long term — sending children to college, planning
a comfortable retirement, providing a legacy for the next generation —
you probably adhere to a long-term investment philosophy.
But a buy-and-hold
strategy doesn’t necessarily mean owning a stock forever. At some point,
you may decide to sell a stock because it no longer meets your diversification
needs, or because the underlying company has lost its competitive position
within its industry. And, on occasion, you might sell a stock because
its price has fallen so far that it may never recover.
Whatever your reason
for selling a stock at a loss, you’ll want to get as much benefit from
the loss as possible.
Fortunately, you’ve
got an ally — the U.S. tax code. Your investment losses are tax-deductible,
to a point. You can use your capital losses to offset any capital gains
you have, plus up to $3,000 of other income, including earned income.
So, for example,
if you realized a $2,000 capital gain this year from selling stocks or
other appreciated investments, you could write off up to $5,000 in losses.
And you can carry forward any “excess” losses for future years.
In fact, because
so many investors have realized more losses than they can write off in
a single year, Congress is considering increasing the amount of losses
that can be deducted annually.
What happens if you’d
like to write off some losses, but you still want to hang on to the stock
that caused them? If you sell the stock, and then buy it back within 30
days, you can’t deduct the losses, because you’d be violating the IRS
“wash sale’’ rule. You could sell the stock, wait for 30 days, and then
repurchase it — but you’d run the risk of having the stock’s price rebound
in the meantime.
As an alternative,
you could sell the stock and immediately reinvest your proceeds in a similar
company. As long as you’re not investing in a stock that is “substantially
identical” to the one you sold, you can generally avoid the wash-sale
rule.
Nonetheless, you’ll
want to consult with your tax adviser and investment professional before
making any of these types of moves. You probably haven’t been wishing
for your stocks to decline, but if it happens, you can use the losses
to brighten your tax season a bit. And that’s always good news.
Eric Cumley is an
investment representative with Edward Jones Investments at 1201-C SE Everett
Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is
an NYSE-member investment firm with more than 8,000 locations nationwide.
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