Many investors notice a security holding that is a loss, and recognize it as a drag on their account. This loss is unrealized, and it may be time to use it to your advantage.
As you head into the final quarter of 2012, it is a good idea to start planning for the taxes. Selling securities at a loss can help offset potential taxable gains in non-retirement accounts. Capital gains and losses are calculated on Schedule D of your tax return. You can net losses against gains thus potentially reducing any capital gains taxes you may owe. If an investor sells the security before December 31, you can use the loss for that year’s return.
Here is how it works:
- An initial investment in a security was made for $20,000 in May 2011.
- Today, the security is worth $13,000.
- The investor decided to sell it resulting in a $7,000 long-term loss. (Note: It is considered long term because the security was held for longer than 12 months.)
- The IRS will allow the investor to use $3,000 (if married, filing jointly) of this loss to be netted against any long-term capital gains. (Note: Long-term and short term gains are calculated separately.)
In the example above, the investor realized this loss to potentially help their tax situation. And, the investor has $4,000 in realized losses he can carry forward for future tax returns. Currently, the IRS allows this carried forward indefinitely, so the investor can use it in the years he has capital gains.
It should be noted that an investor’s anticipated loss is disallowed if, within a period beginning 30 days before or 30 days after the date of the loss sale, the investor purchases a “substantially similar” security. This prohibition is known as the “Wash Sale” rule.
Before we know it, April 15th will be here. Planning now could help reduce the amount you owe Uncle Sam.
(Founders Financial Consultants are not tax advisors and do not give tax advice. Please consult your tax advisor for your particular situation. The above example is hypothetical and not representative of any particular situation.)
Securities and investment advisory services offered through Financial Network Investment Corporation, member SIPC - Founders Federal Credit Union, Founders Financial Group, LLC and Founders Insurance Services are not affiliated with Financial Network Investment Corporation. Financial Network Registered Sales Branches are located at 607 N. Main Street, Lancaster, SC 29720; 1290 Old Springdale Road, Rock Hill, SC 29730; 100 Springcrest Drive, Fort Mill, SC 29715; 1307 Boiling Springs Road, Spartanburg, SC 29303.
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This article was written by Keith Benton, CFP with Founders Investment Services Team.