U.S. Investor End of Year Tax Loss Harvesting and Other Strategies

By: Nilus_Mattive

Since I’m not only doing the usual holiday running around, but also trying to prepare for an upcoming three-week trip to India, I’m acutely aware of just how hectic this time of the year can be.

But I also recognize that this is precisely one of the most important times for making moves that could significantly impact your finances, too.

I’m talking about relatively simple moves you can make that might otherwise get lost in all the other things on your personal task list.

For Example, Now Is the Ideal Time for Tax Loss Harvesting …

While the markets have certainly rebounded very sharply this year, you may still have a couple investments in your portfolio that are both underwater and likely to remain dead weight going forward.

If that’s the case, now is a great time to consider booking the losses in preparation for your 2009 tax return … especially if you’ve also bagged some gains this year!

Let’s start with a quick refresher on tax loss harvesting.

A little planning now can really pay off come April!

When you sell a position at a loss, the IRS allows you to deduct that loss come tax day.

It works like this:

First, if you also booked gains for the year, you’ll be able to offset them on a dollar-for-dollar basis with no limit.

Second, if you recorded more losses than gains — or no gains at all — you can use your losses to offset some ordinary income. The maximum amount is $3,000 ($1,500 if married filing separately) … but you can carry additional losses forward for future tax years.

Doing this before January 1 makes great sense if you want to rid your portfolio of some losing positions. You can get the tax break and reinvest the remaining money into more attractive opportunities.

Of course, even if you have underwater positions that you would like to continue holding for the long-term, you still might consider selling them at a loss for the tax advantage.

Reason: As long as you wait more than 30 calendar days before buying back those same positions, the loss will count on your tax form.

The IRS applies what is known as a “wash rule,” under which they will not recognize a loss if you’ve bought replacement stock within 30 calendar days before or after you sell your losing position.

However, if you wait 31 days, you’re fine and the loss counts.

Now, the real risk is that the stock could soar while you’re on the sidelines. In that case, you’d miss out on the gains. However, after such a strong run lately, I wouldn’t expect another spectacular surge over the next month or two.

Obviously, commissions are another factor. But if you’re talking about one or two positions — and using a discount broker — the tax writeoff will more than make up for the rather trivial costs.

So as the year winds down, take a good look at your portfolio and consider booking some losses.

Three More Year-End Steps to Consider …

In addition to tax loss harvesting, the end of the year is a great time to consider other measures that can have a big impact on your finances.

Here are three:

First, establish a budget, or review and update your existing one.

For example, around the end of the year, my wife and I will sit down and go over our expenditures during the past year, and set guidelines for our spending in 2010. While it won’t be the most exciting night of our lives, it may very well be one of the most important to our long-term happiness.

Second, review your overall investment portfolio to make sure it matches your goals and risk tolerance.

Again, given the recent runup in many asset prices, you will certainly want to take a little while to review whether or not your asset allocation still matches your original plan. And given the turbulence over the last few years, you might also decide that a complete overhaul of your portfolio is necessary for a sound night’s sleep.

Third, start thinking about new financial twists that the new year will bring!

For example, one strategy that I have advocated in the past is converting a traditional IRA to a Roth. I won’t repeat the benefits of doing so here.

But I would like to remind you that, beginning next year, anyone will be able to do this conversion — regardless of their annual income. Better yet, if you effect this change in 2010, you will be able to break up the income over two years for income tax purposes.

Bottom line: While I don’t think you should spend the holiday season obsessing over nickels and dimes, I do think it makes sense to take a little time to think about where your finances are coming from and where you want them to go in 2010.

You might even find that having a few days off from work, and having your family members all gathered in one place, makes the holiday season an ideal time for a quick discussion on topics that can really make a huge difference in your wealth and prosperity for years to come.

Best wishes,

Nilus

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