Tuesday, December 8, 2009

Harvesting Losses

The last corn fields around my house were harvested this past week. All the hard work and risk (think weather, corn prices) the farmers took has paid off.

When things go wrong (drought, flood, wind) and the crop is poor, the farmer still harvests what he can. Now that the year in closing, it is time for taxpayers to harvest losses as well.

The stock market has left many people in the hole. The rally that started in March has made some of us feel a little better, but anxious we are overdue for a correction. Locking in losses now for tax purposes can make sense and put you in a position to benefit if the market continues to rally.

If you have mutual funds or ETFs, it is easy to harvest losses with little risk. By selling a growth stock mutual fund and purchasing a different growth fund in the same fund family, you have harvested the first mutual funds loss and the new fund keeps you in the market if things keep going up without additional sales charges.

You can deduct $3,000 of capital loses on your federal tax return every year above and beyond other capital gains; Wisconsin only allows a $500 per year deduction. It still makes sense to harvest loses. If you realize a $20,000 loss from the first mutual fund, you can use that loss to reduce other capital gains now and in future years, plus the additional $3,000 until the loss is used up.

Careful planning can cut your tax burden in this tax increasing environment. Don’t waste the opportunity.

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