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Wealth Management

End of Year Tax Advice

by Robin S. Davis, CFP

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End of Year Tax Advice How to Use Major Market Losses to Lower Your 2008 Taxes

As you continue to follow the basic rules of investing by following a disciplined investment process and staying invested, you may find yourself very dizzy while riding the rollercoaster of life; life affected by Federal Reserve decisions made for your own good, CEO bonuses and golden parachutes, and corruption on Wall Street.  You may be feeling disbelief as you scratch your head wondering “what happened” and “how did I not see this turmoil in the financial markets coming”.  What is a person to do?

The answer is simple.  Find a way to take advantage of times when most of the country is confused and in shock, when confidence is at its lowest point since the great depression, and the market has followed suit.  Since it is near impossible to determine the day the market will hit bottom, I think we can agree that we have not seen the indices at such lows in a very long time.  

Regardless of how your portfolio was diversified, you are very likely experiencing a 15% to 40% loss in your taxable assets.  There has not been a better time in the last few years to evaluate your holdings to make sure you are properly positioned for the day the market turns around.  One way to take advantage of a deeply discounted market is to sell those assets that are least likely to benefit from a turnaround, and buy deeply discounted securities that may benefit most when consumer confidence resumes and the economy flourishes.  This strategy may have you realizing tax losses in the six- to seven-figure range this year as what used to be working well has been decimated.  

Using those losses to offset capital gains this year, and/or future years as they can be carried forward, is the second way to take advantage of a tumultuous market.  For those investors who have held large positions of certain stocks for the last 10 to 20 years and still show a decent profit may want to consider selling a percentage of the holding in lieu of the new trend of old, perceived solid companies such as Enron, WorldCom, and most recently Lehman Brothers and Washington Mutual’s demise.  This has taught us that anything can happen to any company and it is probably not wise to have a large interest in one company.  Therefore, rebalancing your portfolio in chaotic markets allows you to get it properly allocated by repositioning the money the way you want without triggering taxes.  

Other capital gains that would benefit from capital losses are the sale of a family business or the sale of real estate.  If you are in the process of selling a business that will result in a profit in 2008 you will definitely want to assess your losses to offset the gain before December 31st.  If you had planned to sell your business next year, or in later years, don’t fret.  As I mentioned earlier, you may carry forward any unused capital losses to use against future capital gains.  

The same goes for the sale of real estate that results in a capital gain.  The most common real estate gain is the sale of a primary residence.  Although the current tax law allows a married couple to exclude $500,000 in gains from taxes, portfolio losses can be used to offset taxes on the gains greater than $500,000.  Another scenario is a single person who sells a house at a gain as the IRS only allows that person to exclude $250,000 with any additional gains possibly pushing them into a new tax bracket if not for losses to counteract that risk.  

You may be wondering what happens to capital losses if one spouse passes away before the residence is sold.  For 2007, if the residence was not sold in the year of death, the surviving spouse lost the $500,000 exemption and paid taxes on gains over $250,000.  A recent change in the tax code now allows a surviving spouse to sell the house within two years of the date of death and, if sold in 2008 or later, maintain the $500,000 exemption.  

As you can see, there may be advantageous strategies you can use to benefit from a decimated market.  As always, I recommend working with a competent and knowledgeable team of financial professionals and tax advisors who may be able to make recommendations on how to rebalance your assets for a more favorable increase in an upturn in the markets and at the same time generate capital losses you can use for years to come.  Carry forward losses make it easier for your advisors to make recommendations, and for you to make decisions, in the future to divest yourself of assets you should sell in order to keep any gains.

Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Enhancement Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor and Ten Easy Tests for Finding the Best One. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit, or email:

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