After Tough Year, Taxes Can Bring Pain and Relief
Sunday, February 15, 2009
In 2008, the recession set in. Millions of people lost their jobs. Many millions more lost significant sums of money in stocks or mutual funds. People lost homes -- their primary residences, their places on the beach, or both.
For many, 2008 was a lousy year. And now the tax man cometh. In certain situations he bringeth bad tax news to further muddle crummy economic circumstances. In other cases, the tax man provides some relief. It can all be very confusing.
"The important thing I would say is for people not to lose their heads over all of this," said Jackie Perlman, analyst at the Tax Institute at H&R Block. "Make sure you know the laws. If there was a dramatic change in the lifestyle you might want to speak to a tax professional."
Below, we have presented some common situations that emerged from the recession and what the tax implications are for each. For more information, go to http:/
You lost money in the stock market.
Join the club. The Dow lost 34 percent in 2008, and the S&P 500 lost 38 percent. Stockholders got out of the market, particularly mutual funds, in record numbers. Many people lost a lot of money, which is never amusing, but there is an upside come tax season. The upside is: Write it off!
Let's say you lost $50,000 on XYZ Corp. If you sold the shares at a loss before Jan. 1, you are in a good position. You can use $3,000 of that as a capital loss to reduce your taxable income. And you can continue to draw $3,000 a year off the initial $50,000 until that number reaches zero.
"It's terrific," said Bill Smith, director of the national tax office at CBIZ MHM. "You can dribble down your $3,000 a year."
Another way this $50,000 loss can help you is if you had stocks that you sold at a gain. (Yes, some stocks did go up last year, though you really had to hunt for them.) In that case, let's say you had a $10,000 gain on LMNOP Corp., as well as that $50,000 loss on XYZ. You can deduct $10,000 of your loss on XYZ from your capital gain on LMNOP. And you can then use an additional $3,000 from your loss on XYZ as a deduction from other taxable income. That means you would be able to sell shares at a gain with no tax consequence, and you would now have $37,000 in deductions left over to carry forward until they're gone.
You lost money in a stock or a mutual fund, but didn't sell the position at a loss before Jan. 1.
A loss has to be realized before there are tax benefits. But it's never too early to think about taxes, so talk to your tax professional now so you don't miss out on potential benefits next tax season.
You think you are crafty, selling a stock at a loss on Dec. 31 and then buying it again just after the new year.
Think again. "You can't do that," Smith said. You cannot claim a loss if you purchase the same stock within 30 days before or after you sold the position. "They don't let you write off the loss if you are not really changing position on the stock," Smith said. This is called the "wash sale rule." Be aware.