Monday, August 24, 2009

Portfolio timing

The end of the year is the right time to examine your investments (winners and losers over the course of the year) to take the steps necessary to minimize your capital gains income and maximize the benefit of any capital losses. Especially this year, when the stock market took its roller-coaster ride, gathering your portfolio's records for the entire year can make a difference in not only what you might buy or sell in November and December but what estimated tax you will need to pay (or not pay) for the fourth quarter of 2009.

Long-term capital losses can be used to fully offset long-term capital gains. Losses taken in excess of gains can also be used to offset up to $3,000 in ordinary income (or $1,500 for a married couple filing separately). The strategy for short-term gains and losses follows a similar game plan, although coordinating the two sometimes takes special care. Unlike excess business losses that can be carried back two years to net an immediate refund in many cases, an individual's net capital losses unfortunately can only be carried forward.

In calculating gains or loss for purposes of balancing your gains and losses at year end, remember that, for tax purposes, it's not how much your stocks have gone down for the year but rather have much gain or loss you've realized since purchasing them. For example, you still may owe capital gains tax on stock acquired in 2001 at $15/share even though it may have dropped $20 in 2009 from a high of $65 to $45 when you sold it. You still have capital gain of $30/share on the sale.

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