NFIB

How to Profit from Your Losses
07/ 31/ 2003

by Barbara Weltman

Did the faltering economy deal a heavy blow to your investment portfolio? If so, the tax law may provide some relief to cushion your losses. Here are some strategies you can use to turn losses to your advantage.

Use losses against ordinary income.

You can use capital losses from the sale of securities and other investment properties to offset not only capital gains (including capital gain distributions from mutual funds), but also up to $3,000 of ordinary income, such as a salary and interest income. Capital losses in excess of the $3,000 limit can be carried forward and used in future years. You can't take a tax loss for a mere decline in an asset's value -- you must actually sell it.

Caution: The "wash sale" rule prevents you from using losses if you buy substantially identical securities within 30 days before or after the loss sale. Wait out this blackout period or buy something different so you can use your losses.

Convert your IRAs now.

If you have traditional IRAs, consider converting them to Roth IRAs so that all future earnings can become tax free. The price of conversion is paying tax on the accounts now, but with values depressed this may be the best time to act.

Gift-giving program.

If gifts are part of your estate-planning to reduce your holdings on a tax-free basis, now may be a great time to give securities and other property to your children, grandchildren and others. Your annual gift tax exclusion of $11,000 in 2003 ($22,000 if you are married and your spouse consents to the gift) -- the amount you can transfer without any gift tax -- will go farther.

If the gifted shares later increase in value, the benefit will accrue to the recipient and won't be part of your estate.

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This article originally appeared in the August/September 2003 issue of MyBusiness magazine.

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