Year End Tax Loss Planning Essay
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 of selling investments that are worth less than the purchase price, to realize a loss. An investment loss cannot be realized until the investment is sold and must be sold before the close of business on December 31st to be eligible for that year’s tax reporting. Once a loss has been realized, it can then be used to offset other investment gains that were produced throughout the tax year. If the amount of realized losses outweighs the amount of realized gains for the tax year, taxpayers can deduct up to $3,000 of the outstanding tax loss against ordinary income made through the year. If there are any unused tax losses, the losses can be carried forward into the next year to offset future capital gains or ordinary income.