Year-end tax planning tip #2 - Sell Investments to Take Losses

If you have investments such as stocks, mutual funds, or bonds that are currently trading for less than you originally paid for them, then it might be beneficial to sell those investments before the end of the year so you can deduct the losses on your 2009 tax return. If you are considering this, then please be aware of the following:

• Selling these investments at a loss creates a capital loss which is only deductible against capital gains. A special rule does allow up to $3000 of capital loss to be deducted against other income such as wages, interest, and business income, though. So even if you have no capital gains this year, capital losses can still provide a small amount of tax benefit.
  
• If your capital losses exceeds your capital gains by more than $3000, then the excess loss is carried forward and can be used in later tax years.
• If you sell an investment holding at a loss and buy back the same holding within 30 days of the loss sale, then the loss will be disallowed under the "wash rule." The "wash rule" applies even if the loss sale occurs in December 2009 and the subsequent purchase of the same holding occurs in January 2010. There is no "reset" at the end of the year. If you wait 31 days to buy back the holding, then the wash rule does not apply.

As with any tax planning technique, though, don't let tax law be the only factor that influences your decision. Educate yourself about the non-tax consequences of this strategy with your investment advisor or other professional to be certain selling investments at a loss fits into your overall financial plan.