Investors should examine stocks before dumping for tax deduction

By Theresa Agovino

Associated Press

Q Many of my stocks are in the dumps because of market conditions and I have significant paper losses. Should I sell those stocks so I can get a tax deduction?

A The Internal Revenue Service allows a $3,000 deduction for investment losses, but several factors should be considered before selling stocks to gain that benefit, said Robert Doyle, a partner at the St. Petersburg, Fla., accounting firm of Spoor Doyle &Associates.

First, Doyle said, investors should see if they have substantial gains they need to offset. For example, if an investor has an investment gain of $30,000, he or she might want to consider selling stocks to offset that income and avoid paying taxes on it. Should the losses and gains be equal, the situation is a wash. But should losses be greater than gains, or if an investor has only losses, the investor can still only deduct $3,000, regardless of whether the loss is $10,000 or $100,000.

The good news is a taxpayer can carry the loss forward indefinitely, meaning that he or she can continue to deduct $3,000 for years to come until the amount of loss is reached. That means, for example, a $12,000 loss can be extended over four years. This is especially useful to offset gains in future years.

But before dumping stock, Doyle suggests investors examine each investment. He said it might not make sense to sell a solid firm such as General Electric because its shares are almost certain to rebound. However, it might not be such a bad idea to sell stocks in dotcom companies that are unlikely to rebound.

Investors can use the tax laws and the weak market to their advantage, said Marilyn Dimitroff, president of Capelli Financial Services Inc, a Bloomfield Hills, Mich.-based financial planning firm.

Dimitroff said investors can sell either stocks or funds that have swooned, and then buy either the same investment or a similar one at the cheaper price. Investors have to wait 31 days to repurchase the same stock they sold if they want to enjoy the tax benefit. However if an investor is selling a large-cap growth fund, for example, he or she can immediately buy a similar one (but not the same fund.)

Dimitroff said the $3,000 deduction is more likely to benefit someone in a higher tax bracket but is still useful for people of all incomes.

“Tax loss selling is a common, widely used technique to mitigate taxation,” Dimitroff said.