Tax Breaks for Investors


Tax Breaks for Investors

You can carry over last year's losses to off-set taxes in years to come.

Last year's bear market was brutal for investors. If you cashed in some of your losers before the end of the year, you may take some solace when you file your 2008 return. You can use them to reduce you tax bill. And, if your income places you in one of the two lowest tax brackets, you will pay no capital gains tax for 2008 -- assuming you had any gains for the year.

Assets held for a year or less are considered short-term. Those held for more than a year are long-term. In figuring your taxes, you first must match any short-term gains with short-term losses and long-term gains with long-term losses. (These strategies apply to your taxable investment accounts, not your tax-deferred retirement accounts such as 401(k)s and IRAs.)

If, after netting capital gains and loses, you are left with a capital loss, you can use it to offset up to $3,000 of ordinary income. You can carry over excess losses to future tax years.

Tax rates. A net short-term gain is taxed as ordinary income at rates ranging from 10% to 35%. For taxpayers in the 25% and higher brackets, long-term gains are taxed at 15%. Beginning in 2008, those in the 10% and 15% brackets pay no tax on long-term capital gains. And if you are normally in the 10% or 15% bracket but your capital gains pushes your total income above the 15% bracket, you will pay taxes only on the gains above the 15% level.


Here's how it works. Suppose a couple who files jointly has ordinary taxable income of $64,000 and long-term capital gains of $3,000. The top of the 15% income tax bracket for 2008 is $65,100 for couples ($32,550 for individuals). So $1,100 of their gains would benefit from the 0% rate. The remaining $1,900 would be taxed at the long-term capital gains rate of 15%.

Worthless stock. In most cases you can't deduct a loss on a stock unless you realized it by selling it before the end of the year. But there's an exception to that rule. You can deduct a loss on a worthless security without selling it. But you need evidence that the stock is wholly worthless with no chance that it will become valuable in the future. One good indicator is when a company is being liquidated in bankruptcy and the shareholder equity will be completely wiped out.

To write off a worthless stock, you report it on Schedule D as though you sold it for $0 on December 31. That date also determines whether you have a short -- or a long-term loss. In the section where you're asked for the sale date and selling price, just write "worthless." Your loss is the full cost of the stock.

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