Welcome back to another edition of "Speaking Mathanese." This Motley Fool series tackles financial math myths, deconstructing the computations that make the biggest difference to your bottom line.
This week, our quest to make you smarter than a fifth-grader has us ditching the dividend tax to discuss the fuss over tax-loss selling.
And you thought we were done with taxes. Silly Fool.
The myth
Why can't we be done? Because capital gains never exist in a vacuum, which is a good thing. (Uncle Sammy likes us investors.)
Allow me to explain by way of a mock portfolio, beginning with our primary holdings from the past three weeks:
|
Company |
Capital Gain |
Dividends Paid |
|---|---|---|
|
Amazon.com |
$3,071.00 |
$0.00 |
|
Boeing |
$1,109.00 |
$130.00 |
|
Microsoft |
$670.00 |
$39.00 |
|
Procter & Gamble |
$520.00 |
$128.00 |
|
Volcom |
$1,792.00 |
$0.00 |
Now, had you kept these stocks for at least 366 days, you'd pay 15% in tax on your gains and dividends, right? Right?!?
The math
Well, yes, but there's more to it than that, which brings us to the topic of tax-loss selling. The IRS, you see, will allow you to offset your gains with your realized losses, thus lowering your effective tax bill from investing. Neat!
Let's run through an example. First, we'll assume that Amazon and Boeing were long-term gains (held for at least 366 days) and that Microsoft, Procter & Gamble, and Volcom were short-term gains (held for 365 days or less).
Now, let's also assume that you realized these losses:
|
Company |
Capital Loss |
|---|---|
|
KB Home |
$926.00 |
|
Panera Bread |
$1,329.00 |
|
RealNetworks |
$247.00 |
|
Sirius Satellite Radio |
$80.00 |
|
The Children's Place |
$1,448.00 |
Finally, let's say that KB Home and Panera Bread were long-term losses (realized after 366 days) and that RealNetworks, Sirius, and The Children's Place were short-term losses (realized in a year or less).
Got all that? Let's calculate your total taxable investment income. Here's the Mathanese:
Taxable investment income = (Long term gains - long-term losses) + (short-term gains - short-term losses)
Save your answer for next week, when we'll be back with more taxing topics. Have questions in the meantime? Submit them here.
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Amazon is a Stock Advisor selection. Microsoft is an Inside Value recommendation. Volcom is a two-time Motley Fool Hidden Gems pick.
Fool contributor Tim Beyers writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Find his portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is lobbying its local school district for a course in beginning mathanese.
