Capital Gains and Losses

For tax purposes, capital gains and losses are used to offset each other.  However, any excess capital loss can also offset up to $3,000 of high-taxed ordinary income in 2009.  The remainder is carried over to next year.  If a gain qualifies as long-term capital gain (i.e., you have owned the asset for more than a year), the maximum tax rate on the gain is normally 15% (5% for low-income taxpayers).

Year-end strategy: When it makes economic sense, “time” capital gains and losses.  For example, if you have already realized capital gains in 2009, you might realize capital losses at year-end to absorb those gains.  Similarly, if you have realized capital losses in 2009, gains realized at year-end can offset those losses.  For taxpayers in the regular 10% or 15% tax brackets, the maximum tax rate for long-term capital gains of 5% is reduced to 0%.  Even taxpayers in higher tax brackets may benefit from the 0% rate on a portion of their long-term capital gain.

Tip:  Depending on your situation, you might have children in low tax brackets sell securities to realize long-term capital gain in 2009.  This tax break is scheduled to expire after 2010.

Let me know if you will be using this strategy this year.

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