Case Study Of Year-End Tax Loss Planning
As we near the end of 2016, individuals with taxable investment accounts should be evaluating their tax situation and considering favorable tax-saving strategies before the year is over. Year-end tax planning can be a valuable and money-saving opportunity that should not be overlooked. Therefore, if you are holding investments in stocks, mutual funds, and bonds that are worth substantially less than their original purchase price, you should consider selling the investments before the year is over. Through a process known as tax-loss selling, losses on bad investments can be turned into an asset, which can then be used to save money on your taxes for the year.
What is tax-loss selling?
Tax-loss selling is the process …show more content…
To capitalize on the decline in value, the position can be sold to create a realized loss on the difference of $10,000. This loss can now be used to offset other capital gains that have occurred during the year. If an investor had success in other areas of their portfolio, which produced capital gains for the year of $5,000, by selling the Exxon Mobil investment, his or her tax liability is reduced to zero, and $5,000 in remaining losses can be applied to future capital gains.
For tax-reporting purposes, short-term gains and losses are first netted against each other for the tax year. Next, long-term gains and losses are netted. Finally, the remaining outcomes are combined. As a result, a net short-term loss of $10,000 can be applied against a net long-term gain of $5,000 for a remaining short-term loss of $5,000. As mentioned before, if your loss outweighs your gain, you can claim up to $3,000 of the losses against your ordinary income and the remaining losses can be used to offset future gains. In the above example, the remaining $2,000 can be applied to future