Last-Minute Investment Tax Tips for 2012
(#2 in a four-part series)

Tax-Loss Harvesting

Like many investors this time of year, you may be looking to rid yourself of the losers in your portfolio to realize some capital losses to offset your realized capital gains and reduce your 2012 tax bill. That may prove a bit difficult this year as 2012 has been a solid year for the equity markets and the gains have been very broad-based. But in case you do have one or two investments in the red, here are a few things to consider regarding tax loss harvesting:

1. Realizing losses is only worth doing if you need those losses to offset gains. If you have capital loss carry-forwards from previous years or other deductions that you can use to offset your gains, there is no need to tax-loss harvest because you would be selling securities that you otherwise might not want to sell at this time or that you should give some time to recover. You only want to harvest the losses if they are actually beneficial to your tax situation this year.

2. While Congress has yet to get its act together to let us know what tax rates will be next year, there is a decent chance that tax rates are going up, especially if you are a “high-income earner”, although the exact meaning of that term remains undefined as well. But, if you expect to earn north of $250,000 in 2013, there is a possibility that your ordinary income tax rate as well as your long-term capital gains tax rate are both going up next year. What we do know for certain is that couples earning more than $250,000 in 2013 ($200,000 for individuals) will owe a 3.8% tax on investment income (defined as interest, dividends, and capital gains). If that is you, you should consider holding off on doing any tax loss harvesting this year and postpone it until next year as those losses only become more valuable to you at higher tax rates.

3. When tax loss harvesting, you need to be aware of the wash rule. If you sell an investment at a loss and then repurchase those shares or shares of a “substantially identical” investment within 30 days prior to or 30 days after the sale, you won’t be able to use the loss this year. It is especially important to be aware of this rule now that brokers are reporting your cost basis to the IRS. Along with reporting your cost basis, they are also required to report if you violate the wash rule with any of your sales.

As always, both tax and investment advice are always best when they are personalized to your specific situation, so it is always advisable that you speak with your tax and financial advisors before making any trades.