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Federal Employees News Digest : Dec. 17, 2012
December 17, 2012 Vol. 62, No. 23 8 Visit us on the Internet at www.FederalDaily.com While stock and bond markets have per- formed fairly well during 2012, some stocks, bonds and open-ended funds may have decreased in value. A depressed stock or bond can cast a dark cloud on anyone's finances, but there can be a tax benefit resulting from the sale of a depressed capital asset at a loss, thereby producing a capital loss. A capital loss results if an investor sells a non- retirement portfolio investment at less than its adjusted cost basis. Any expenses from the sale are deducted from the sales proceeds and are added to the loss. A capital loss is a "recognized" loss only if a capital asset held in a non-retirement portfolio---a stock, bond, open-ended fund, closed-end fund, etc.---is sold. A capital asset that has lost value but currently is in a portfolio has a "realized" loss that has no tax consequences. For 2012, anyone who wants to take advantage of their capital losses on their 2012 income tax returns must sell their capital asset no later than the close of business on Dec. 31, 2012. A recognized capital loss offsets any recognized capital gains. If there are additional capi- tal losses, some of these losses can reduce an individual's other income, thereby lowering federal and state income taxes. While the IRS allows capital losses to reduce one's income, the process of applying these losses is not simple. The following summarizes the "pairing" of losses and gains. • Any capital asset owned for at least one year is considered to be a long-term capital asset. Any asset held less than one year is considered to be a short-term capital asset. • Short-term capital losses are first applied against short-term capital gains. • Long-term capital losses are first applied against long-term capital gains. • Short-term net capital gains and losses and long-term net capital gains and losses results are combined. For example, one combines a net short-term capital loss of $2,500 and a net long-term capital gain of $3,000, result- ing in a net gain of $500. • If the net total is a capital gain, one pays tax on the entire gain. • If there remains a net capital loss, one can deduct up to $3,000 of the loss from other income. • If there is a net capital loss of more than $3,000, then the excess capital losses are carried over to the following year and applied against that year's capital gains. A rather large capital loss can be used as a deduction indefinitely; therefore, keeping good records is important. Beware of the 'wash sale' rules After selling a capital asset and incurring a capi- tal loss, an investor is prohibited from buying back the identical asset 30 days before and after the date of the sale. This is in accordance with the IRS "wash sale" rules. The wash sale rules prohibit the owner of an investment holding from selling a holding at a loss, using that loss to reduce taxes, and then turning around and buying the same or identical holding at a lower price within 30 days before or after the sale. When a transaction violates wash sale guidelines, the IRS will not allow the investor to immediately use the tax loss. Rather, the loss deduction is post- poned to a later date and added to the cost of the new holdings bought. The following example illustrates: Joan bought 100 shares of stock XYZ for $2,000 and sold them for $1,500 on Dec. 10, 2012, producing a $500 capital loss. Fourteen days later on Dec. 24, 2012, she bought 100 new shares of stock XYZ for $1,000. Since Joan bought the identical stock within 30 days of selling the stock at a loss, she is not allowed to deduct the loss for calendar year 2012. But she can add the $500 disallowed loss to the $1,000 price of her new XYZ shares, thereby producing a cost basis of $1,500 for her new XYZ shares. The IRS always has the power to disregard what it considers to be a "sham" transaction. Even if an investor makes it look like a substantially different security, if the IRS identifies that there is no economic substance to the transaction, it will disal- low the loss. Some investors have tried to get around the wash sale rules by buying the sold holding for an individual retirement account, or IRA. These investors argue that since an IRA---whether a traditional IRA or a Roth IRA---is separate from an investor's individual personal (non-retirement) holdings, the wash sale rules should not apply. But in IRS Revenue Ruling 2008-5, the IRS ruled that if the individual investor and the IRA owner are the same person, the wash sale rules will apply. Individuals who want to sell capital assets at a loss in order to reduce their 2012 income tax liabilities should note all such sales must have a "trade" date of no later than Dec. 31, 2012, even though the "settlement" date is shortly after Jan. 1, 2013. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Employees can use capital losses to lower taxes, but beware of 'wash sale' rules
Dec. 10, 2012
Jan. 14, 2013