Cutting losses to lower taxes

As you manage your investment portfolio in today’s market, it is important to take

into account any tax impacts of your investment decisions, especially at the end of the

year. Changes you make today could have an impact on your 2008 tax return. Every time

you sell a capital asset including: stocks, bonds, mutual funds, investment real estate,

even collectibles, there is likely a tax impact.

Making use of losses

The current investment and economic environment has created an increased

likelihood that you may take a loss on the sale of an asset. You need to assess how gains

and losses match up in your portfolio, and consult with your tax professional to see if

there are tax-saving opportunities.

For example, if you purchased $10,000 worth of stock more than 12 months

earlier, but its value has declined to $8,000, you could sell it today and realize a long-

term capital loss of $2,000. By contrast, if another stock you owned for more than 12

months has returned a profit of $2,000 or more, you could also sell that position, and

have most, or all, of the gain offset by losses you’ve taken in your other investment. This

can be an effective way to help cushion the blow of investment losses by lowering your

tax bill.

Know when to hold

One key factor in determining just what tax rate applies to your sale of a capital

asset is the length of time you have held it. The most favorable rates apply when you own

the asset for more than 12 months. It then qualifies for long-term capital gains tax

treatment, rates that can be significantly lower than those that apply to assets sold within

a 12-month holding period. It is important to note that this only applies to investments

held in “taxable” accounts. Tax-deferred savings, such as your workplace retirement plan,

IRAs and annuities, are not affected by capital gains tax. Any distributions from tax-

deferred accounts are taxed as ordinary income, subject to higher rates.

Long-term capital gains are taxed at a 15 percent rate by the federal government

for taxpayers with gains taxed in the 25 percent tax bracket or higher. The rate is zero

percent for those whose gains fall in the 10 percent or 15 percent bracket for ordinary

income taxes. By contrast, if the sale is subject to short-term capital gains tax rate, the tax

owed will match the higher rate that applies to your ordinary income taxes. So a $1,000

gain on the sale of an asset held one year or less would result in federal income taxes of

$250 for a person in the 25 percent tax bracket. By waiting more than 12 months to make

the sale, the 15 percent long-term capital gains tax applies, resulting in a tax of just $150

– a $100 savings. If the same person were in the 15 percent bracket the federal income

taxes on the long-term gain would be zero percent. While taxpayers often realize long-

term capital losses to offset long-term capital gains, taking long-terms capital losses to

offset a long-term capital gain otherwise taxed at zero percent is not necessarily a tax-

saving strategy.

Timing for higher rates

Long-term gains on items such as collectibles, including coins, stamps and

antiques, are taxed at a maximum 28 percent for all individuals. For people below the 28

percent tax bracket, their ordinary tax rates apply. There is also a different rate for real

estate where depreciation was applied. Since depreciation reduces the cost basis on the

property, it also increases the realized gain on the sale. Depreciation amounts are

recaptured and are taxed at a maximum 25 percent rate (lower for those in the 10 percent

and 15 percent tax brackets).

Keep in mind that capital losses offset capital gains in the same year if that results

in a net capital loss, you can use up to $3,000 of the loss to offset ordinary income and

carry any remaining loss to future years. For example, if you sold assets at a $10,000

capital loss, but you only had $2,000 worth of capital gains to offset the capital losses,

you can only deduct $3,000 of capital losses to reduce your taxable income. That could

leave $5,000 in losses that can be carried forward to offset future gains or income in other

tax years. This is another factor to keep in mind as you manage asset sales near the end of

the year. It may make sense to sell only part of a losing position in the current year if you

will not be able to utilize all of the losses.

Find an expert

In the current volatile market environment, coordinated support from both your

tax professional and financial advisor can be critical to capturing the greatest tax benefit

from your investment moves.

Daniel J. Lensing, CPRCFinancial Advisor

Business Financial AdvisorAmeriprise Finanical Services, inc.

14755 No. Outer 40, Suite 500Chesterfield, MO 63017

Tel: 636-534-2097

This column is for informational purposes only. The information may not be suitable for every

situation and should not be relied on without the advice of your tax, legal and/or financial

advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice.

Consult with qualified tax and legal advisors about your tax and legal situation. This column was

prepared by Ameriprise Financial.

Financial planning services and investments offered through Ameriprise Financial Services, Inc.,

Member FINRA & SIPC.

© 2008 Ameriprise Financial, Inc. All rights reserved.

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