Selling at a Loss Can Help Your Tax Bill
It has been a terrible year for the stock market, but there may be a consolation prize in it for some investors: a tax loss that can help them offset their income.
Dumping weaker parts of a portfolio to offset taxes seems obvious when returns are hefty, but it can make just as much sense in rough years.
With the stock market down more than 40 percent this year, some mutual fund investors might be surprised to find they owe taxes even as the value of their investments has tumbled. Some who sold earlier this year when markets were higher might see relief turn to disappointment when the tax bill arrives. And even those who have stayed invested could take a hit -- some funds had so many shareholders getting out that managers were forced to sell investments that would trigger capital gains taxes.
"That's a big whammy for a client when your portfolio is down 40 percent, but you've got a 10 percent capital gain," said Thomas Ruggie, president of Ruggie Wealth Management in Tavares, Fla. "Clients don't take that very well."
He said: "There is absolutely no reason that anybody should pay capital gains taxes in a year that the losses are as large as they are. If you've got gains you've got to offset, you've got to be selling something."
Still, investors shouldn't give the "sell" order until they've determined that tossing aside an investment is the right move. Those who have ridden the market down from its October 2007 peak should consider whether getting out now is wise. The pros most often say it's better to hunker down and wait for a recovery rather than sell when stocks have taken such a beating.
Trying to estimate what they might owe in taxes could help determine whether some maneuvers in December are necessary, experts say. Mutual funds typically post on their Web sites whether they plan to make any capital gains distributions.
Doris Merrick, tax director at Brinton Eaton Wealth Advisors, a financial planning firm in Madison, N.J., said investors should guard against hasty selling simply to sidestep capital gains taxes.
"You cannot let the tax tail wag the investment dog. You don't want to give up a good investment of yours to avoid some taxes at 15 percent," she said.
-- Associated Press