Transcripts

"Kevin McCormally's Tax Tips"-Cutting Your Losses

SUSIE GHARIB: With the end of the year approaching, we're thinking ahead to tax season. Here with part three of our year-end tips is Kevin McCormally, editorial director at "Kiplinger's Personal Finance." Tonight, Kevin looks at making the most of your market losses.

KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: So far this year, the stock market has shed over $8 trillion in value. Imagine if all those losses showed up on tax returns next April. We'd save hundreds of billions of dollars in tax. But that's not going to happen. For one thing, a lot of those losses are inside IRAs and 401(k)'s, so they're not deductible at all. And even in taxable accounts, plummeting prices don't automatically translate to tax deductions. That only happens when you sell. And sometimes, dumping a beaten and bloodied stock produces a taxable profit. How's that? Remember, your profit or loss isn't the difference between peak value and what you sell for. It's the difference between the price you paid and what you sell for. Let's say you bought shares for $10 many years ago and they had soared to $50 a share when the market peaked last October. If you sell tomorrow for $15 a share, you feel that you've suffered a 70 percent loss. But in the eyes of the IRS, you have a 50 percent gain. That's why it's so important to carefully review the tax basis of shares in your portfolio when planning year-end sales. If you want to realize a loss for tax purposes to offset gains and up to $3,000 of other kinds of income, be sure to tell your broker or mutual fund which shares to sell to produce the result you're after. If you don't give specific orders, it's assumed you're selling the shares you have held the longest and if those shares have the lowest tax basis, the sale will produce a smaller loss or maybe even a taxable profit. You'll need written confirmation that you ordered the sale of specific shares. Something like, sell the shares from the lot purchased November 16, 2006. So be sure to ask for a letter or an e-mail confirming your instructions. I'm Kevin McCormally.