Disciplined investors sell at the top of a cycle and buy at the bottom. Smart ones also pause and plan at this time of the year, crystallizing losses deliberately before year end to get the desired tax results. How do capital losses impact your tax return? Lucratively.
Capital losses incurred when capital assets are disposed of, first reduce or cancel out this year’s capital gains. After this, unabsorbed losses can be used to reach back to recover taxes paid on capital gains incurred in any of the previous three years.
But what happens if you had no capital gains this year or in any of the prior three years? Capital losses are still valuable, even though many investors fail to report them, and this omission can be very expensive over the long run. That’s because unused capital losses can be carried forward-indefinitely-to offset capital gains in the future.
There’s more good news: if you don’t have another capital gain as long as you live, there is a tax saving bonus at death that will benefit your heirs: those capital losses can be used to offset all other income in the year of death and in the immediately preceding tax year.
If you have missed reporting your capital losses in the past, part of your year end planning should include making an adjustment to prior filed returns to include those losses. You can go back 10 years, so be vigilant; unreported losses incurred in tax year 2004 will not be recoverable unless reported before December 31, 2014.
It’s Your Money. Your Life. Prudent tax loss selling includes scheduling an appointment with both your tax and financial advisors. It would be good to have them both present at the same meeting, in fact. The financial advisor can report on accrued gains or losses in your non-registered accounts; the tax accountant will report on opportunities to offset current year and prior year gains with your current-year un-crystallized losses to maximize your tax refund.