It’s time to sell your losing stocks held in taxable accounts

Pen finance chartMost people saw nice returns this year if they stayed with their portfolio that lost heavily last year. However, you may still have some losers within your portfolio that you should now sell in order to take advantage of losses to offset capital gains. For example, let’s say within your portfolio of 10 different company stocks, you had 8 winners which posted gains, while the other 2 may lost money. If you sell those losers now, you can take those losses against your capital gains for the year, thus decreasing your tax liability. You can deduct up to $3,000 if married or $1,500 if filing separately and or individually. Anything over and above that loss threshold you can carry over and claim on your subsequent year’s taxes.

It doesn’t make sense to do this for just any losing stock, especially if you feel the investment is a good one. Truly, you only want to do this if your quite certain the investment was a bad one.

Not to mention, current capital gains rates are at 15%, it’s certainly possible with the new administration that these rates will increase over the next several years, thus enabling you to take excess losses against gains over the next few years.


Where can I do my taxes online for free?

This year I filed my tax return online for the first time. I still can’t believe how easy it was. The best thing about doing my taxes online was that it was that it was completely free. The second best thing about it was that I took my time and did it early morning because that’s when I think best. But you can do it at any time day or night.

Once I did my taxes online I actually had a refund in my bank account by direct deposit in under two weeks. It is a little worrying to put all my personal information on the Internet but because I used the ‘.gov’ site I was reassured that only the Fed had it and they keep it safe. The IRS.gov is always open for business 24/7. This is the important Internet address.

http://www.irs.gov/app/freeFile/jsp/index.jsp

Once you are on the IRS site there are 5 steps to doing your taxes online for free.
1. Find the “Free File Home – Your link to Free Online Filing” page. At the bottom look for and click on the “I Will Find a Company” . Then have a look round for a ‘Free File company’ such as, FileYourTaxes.com, average1040.com, or Easy-eFile.com.
2. Check out whether you are eligible to use these sites and whether you are eligible to file your taxes online for free. The sites layout the eligibility criteria on the first page.
3. At this step you have to leave the .gov site and go to your chosen free filing company site to start the filing of your return. Make sure you have ALL of your financial information to hand. This makes filing your return much quicker.
4. Once you have started to file your return you may be told that you are not eligible to do it for free. The free sites are obligated to tell you the fee that will be charged up front. Do not continue with your filing until you have gone back to the .gov site to look for an alternate free site (or a lower fee). Or go to IRS e-file Solutions for Taxpayers for more alternatives.
If your income was greater than $56,000 you can still use the forms tool documents for free and do your tax return and file it online.

5. Use the ‘free’ company’s software to fill in your e-files and your income tax returns. The company sends your returns on your behalf to the IRS using a safe system. You’ll get an electronic receipt, which you should keep safe.


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Can I write off or deduct a 401k loss or losses on my taxes? What about investment losses?

With the market in turmoil, many people are facing losses in their 401k, 403b, 457b and are wondering if they have the ability to claim those losses on their taxes.

You cannot claim losses on investments that were made pre-tax, only on investments that were made after tax (and there is a threshold of 2% of adjusted gross income in order to qualify, kind of similar to the requirements for reporting health expenses).

Why? Let’s think about this for a minute; What are you doing when filing taxes? In essence, (if you are an employee of a company) throughout the year you have designated the amount of taxes to be withheld from your pay, in order to ensure your taxes owed at year end are covered.

When you start your return, you enter your take home income, which if you are investing in a 401k for example, does not include your pre-tax investments. Thus, you are already receiving a deduction in your taxes as you are reporting a lower income. If you were to report losses on your 401k, you would be doubling the benefit or deduction from income, if you will. Take John Boy for example, let’s say his salary was $100,000 for the year. He invests 5% pretax into his 401k. Thus, his take home pay would be $100,000 – $5,000 or $95,000, less the taxes he paid on the $95,000. Let’s assume his tax rate is 25% (and this was estimated and deducted from his paychecks throughout the year), his take home pay would be $71,250 and that would be reported as the starting point on his taxes. ow, let’s say he lost $4,000 out his $5,000 he invested. If he were to report that loss, he would be saying lower my income by an additional $4,000 to $67,250, which wouldn’t be true, he already lowered his starting point in the beginning! If he were to report a deduction to income on 401k investments, he would be reporting it twice.

Now, If John Boy made those investments with after-tax dollars, he would have a case for taking the deduction as a loss, because his starting point didn’t account for this already.

So, think about these things in simple terms and as to what you are trying to accomplish in lowering your tax liability, you can only lower that liability once, not twice.

I hope this helps!

Similar related questions:

Can I write off IRA losses? Can I deduct an IRA loss? What can I write off as a loss on my taxes? Can I write off a Roth IRA loss or losses? Can I deduct a 403b loss? Can I deduct a 457b loss? Can I deduct a loss from my 401k? Can I write off or deduct a capital loss on my 401k? Can I deduct losses in my 401k or IRA? I’ve lost money in my 401k, can I deduct or write off those losses on my taxes? Can I write off investment losses? Can I deduct investment losses on my taxes? Can I write off a loss on a 529 plan?


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Consider your tax bracket when setting up your (401k) investments

Knowing your tipping point when it comes to your tax brackets may save (earn) you a bunch of money and tell you if you should be investing more of a percentage of your income. What I mean is this, if you are on the border of being in a higher tax bracket, investing more money into your 401k or IRA or whatever plan you use, could actually put you in that lower tax bracket, saving you a bunch of money in taxes while increasing your investments – that make you money.

Let’s make an example; We’ll put a pal of mine in the spotlight whom we’ll call John. John is a single guy who makes $90,000 a year, and he invests 6% of his pay pre-tax into his 401k plan. His net taxable income would be (assuming he has no other deductions for simplicity that would lower his taxable income) $90,000 – $5,400 (90,000 X .06 = 5,400), or $84,600. In the tax tables below, you would see John falls into the 28% tax bracket, as his income is between $78,850 but not over $164,550. John would pay $16,056.25 plus 28% of the excess over $78,850, in this case that would be $94,000-$84,600 = $9,400 X .28 or $2,632. So, he would pay $16,056.25 + $2,632 = $18,688.25 in taxes for a net take home pay of $94,000-$18,688.25= $75,311.75.

What if John would have put aside 12.5%? $90,000 – $11,250 (90,000 X .125 = 11,250), or $78,750. In the tax tables below, you would see John now falls into the 25% tax bracket, as his income is over $32,550 but not over $78,850. John would pay $4,481.25 plus 25% of the excess over 32,550, in this case that would be $78,750-$32,550 = $46,200 X .25 or $11,550. So, he would pay $4,481.25 + $11,550 = $16,031.25 in taxes for a net take home pay of $78,750-$16,031.25 = $62,781.75.

By investing a little more than double what he was previously, John dropped himself a tax bracket and avoided $2,657 in taxes ($18,688.25 – $16,031.25 = $2,657). Not to mention, his investments went from $5,400 to $11,250. If his company matched that money, instead of having $10,800, he would have $22,500 invested and working for him. If he was 30, and left that alone til he was 60, he would have made over $393,000 (assuming company match of 100%, investment total of 22,500), compared to a little over $188,000 if all he had invested was $10,800 (this number is based off of 5,400 and a 100% company match, investment total 10,800).

Table 1.–Federal Individual Income Tax Rates for 2008

If taxable income is: Then income tax equals:

Single Individuals

Not over $8,025………………………………………………………… 10% of the taxable income
Over $8,025 but not over $32,550……………………………….. $802.50 plus 15% of the excess over $8,025
Over $32,550 but not over $78,850……………………………… $4,481.25 plus 25% of the excess over $32,550
Over $78,850 but not over $164,550……………………………. $16,056.25 plus 28% of the excess over $78,850
Over $164,550 but not over $357,700 …………………………. $40,052.25 plus 33% of the excess over $164,550
Over $357,700 …………………………………………………………..
$103,791.75 plus 35% of the excess over
$357,700

Heads of Households

Not over $11,450………………………………………………………. 10% of the taxable income
Over $11,450 but not over $43,650……………………………… $1,145 plus 15% of the excess over $11,450
Over $43,650 but not over $112,650……………………………. $5,975 plus 25% of the excess over $43,650
Over $112,650 but not over $182,400………………………….. $23,225 plus 28% of the excess over $112,650
Over $182,400 but not over $357,700………………………….. $42,755 plus 33% of the excess over $182,400
Over $357,700 ………………………………………………………….. $100,604 plus 35% of the excess over $357,700

Married Individuals Filing Joint Returns and Surviving Spouses

Not over $16,050………………………………………………………. 10% of the taxable income
Over $16,050 but not over $65,100……………………………… $1,605 plus 15% of the excess over $16,050
Over $65,100 but not over $131,450……………………………. $8,962.50 plus 25% of the excess over $65,100
Over $131,450 but not over $200,300………………………….. $25,550 plus 28% of the excess over $131,450
Over $200,300 but not over $357,700………………………….. $44,828 plus 33% of the excess over $200,300
Over $357,700 ………………………………………………………….. $96,770 plus 35% of the excess over $357,700
6

Married Individuals Filing Separate Returns

Not over $8,025………………………………………………………… 10% of the taxable income
Over $8,025 but not over $32,550……………………………….. $802.50 plus 15% of the excess over $8,025
Over $32,550 but not over $65,725……………………………… $4,481.25 plus 25% of the excess over $32,550
Over $65,725 but not over $100,150……………………………. $12,775 plus 28% of the excess over $65,725
Over $100,150 but not over $178,850………………………….. $22,414 plus 33% of the excess over $100,150
Over $178,850 ………………………………………………………….. $48,385 plus 35% of the excess over $178,850

Notes:
An individual’s marginal tax rate may be reduced by the allowance of a deduction equal
to a percentage of income from certain domestic manufacturing activities.7
Alternative minimum tax liability
An alternative minimum tax is imposed on an individual, estate, or trust in an amount by
which the tentative minimum tax exceeds the regular income tax for the taxable year. The
tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not
exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28
percent of the remaining taxable excess. The taxable excess is so much of the alternative
minimum taxable income (“AMTI”) as exceeds the exemption amount. The maximum tax rates
on net capital gain and dividends used in computing the regular tax are also used in computing
the tentative minimum tax. AMTI is the taxpayer’s taxable income increased by the taxpayer’s
“tax preference items” and adjusted by redetermining the tax treatment of certain items in a
manner that negates the deferral of income resulting from the regular tax treatment of those
items.
The exemption amounts are: (1) $45,000 ($66,250 in taxable years beginning in 2007) in
the case of married individuals filing a joint return and surviving spouses; (2) $33,750 ($44,350
in taxable years beginning in 2007) in the case of other unmarried individuals; (3) $22,500
($33,125 in taxable years beginning in 2007) in the case of married individuals filing separate
returns; and (4) $22,500 in the case of an estate or trust. The exemption amounts are phased out
by an amount equal to 25 percent of the amount by which the individual’s AMTI exceeds
(1) $150,000 in the case of married individuals filing a joint return and surviving spouses,
(2) $112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of married
individuals filing separate returns or an estate or a trust. These amounts are not indexed for
inflation.


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