Year-End Tax Moves Iffy

December 18, 2008
Special Feature

With financial markets in the middle of a perfect storm and a new administration heading for Washington, some time-honored year-end tax-cutting strategies may not be practical this year.

With financial markets in the middle of a perfect storm and a new administration heading for Washington, some time-honored year-end tax-cutting strategies may not be practical this year. What the new President will do about taxes is a key question. Will President-elect Obama follow through on his promises to cut taxes for the middle class and boost the capital gains tax for upper-income taxpayers? Or will he hold off on those moves until the economy recovers?

Even if there’s no way to know the answers to those questions, some tax strategies will still work. Selling losers to offset gains on winning stocks, for example, can cut your tax bill significantly. And though it may be hard to find winners in this abysmal year, you probably have some in your portfolio. Even if you don’t, you can still write off up to $3,000 in stock losses directly from your income. If your losses are greater than that, you can carry them forward to be written off in future years.

When you sell losing stocks, be careful not run afoul of the “wash sale” rule. Basically, if you sell a stock at a loss and buy substantially identical shares within 30 calendar days before or after the sale, it’s a wash sale. That means the wash-sale period extends for 61 days—the 30 days before the sale and the 30 days after—plus the day of the sale itself. Violate the wash-sale rule and your stock-loss deduction disappears. But there’s some good news: that lost deduction gets added to your basis for the new shares, which will reduce the tax bite if you eventually sell them at a profit.