Year-End Tax Considerations

For many investors, 2008 will be a year to forget: With all three major indexes down close to 40% this year, investors are left nowhere to hide. However, if you suffered big losses from your investments in 2008, there are tax moves that you can take to ease the pain.

Early this month, I read an article on The Wall Street Journal that discussed some year-end tax considerations. Two items in the article are directly related to your investments:

  • Write off your losses: By getting rid of your losers after a dismal year, you can offset any capital gain from selling winning stocks/funds or from dividend or capital gain distributions. Even though stocks and funds are most likely to lose money this year, many will still make distributions that are subject to taxes. And if you have big losses (exceeding the $3,000 limit) this year, you can even carry them over to 2009 and beyond, depending on the size of your losses.
  • Deal with worthless stocks: Have your bought any stocks in 2008 that are now worthless? As matter of fact, I did have a few in this category, including Washington Mutual (WM) and Freddie Mac (FRE). On one hand, it’s unfortunate that these stocks aren’t worth anything now. On the other hand, it’s lucky that I didn’t bet too much on them, so the losses are tolerable. But for those stocks, what should I do with them? For me, since I bought them in my regular, taxable brokerage account, I can declare them as “worthless” on Schedule D of Form 1040, according to the article.  That’s what I am going to do :)

As there are only three days left for 2008, are you planning to do any adjustments for your investments for tax reasons?

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3 Responses to “Year-End Tax Considerations”

  1. Writer's Coin |  Dec 29, 2008 at 9:15 pm

    I keep reading the same thing everywhere: “write off your losses.” The thing I don’t like about it is that it makes us (and newbie investors) think about stocks as a year-to-year thing, which is not a good idea. Most people are better off investing long term without selling at the end of every year just for tax purposes.

    Am I right or am I right?

  2. Sun |  Dec 29, 2008 at 9:49 pm

    I don’t just write-off investments for the sake of reducing taxes either. The only times that I want to get rid of a stock is when I really don’t think there is any hope that it can turn around. I am investing in stocks to MAKE money, not to lose money or reduce tax bills (therefore, I never worried about making a little money by selling stocks).