If you've been investing over the past year and you've made some regrettable moves, you probably have some capital losses. That stinks. Still, there's a bit of a bright side to it. You see, thanks to your capital losses, 2014 might present you with a smaller tax bill than you expected.
Here's how it works: Imagine that your investments produce a total capital gain of $10,000 in 2013. As you prepare your tax return in April of 2014, make note of your capital losses, too. If you lost $5,000, you can (in most cases) offset $5,000 of gains with that loss. Thus, if you were looking at a 15% tax rate on your gains, you would avoid paying $750 in taxes. So your loss is actually good for something! And, in a sense, you only lost $4,250.
It's not quite so simple, of course. Here are a few more details on how to deal with capital losses in 2014:
- These losses and gains only occur when you sell the underlying assets. You may be down $1,000 on a stock, but if you're still holding it, it's not a realized loss yet.
- Capital gains and losses in 2014 are reported on Schedule D of your tax return, as usual. The bottom line there is then transferred to your 1040 form.
- Capital losses in 2014, just as in any other year, can keep helping you even if you lost more than you gained. If, after offsetting all your gains with all your losses, you still have a loss left, you can offset some of your taxable income with it – up to $3,000.
- It gets even better than that. If you gained $2,000 in 2013 and lost $10,000, you can offset that $2,000 gain and pay no capital gains tax on it. Your remaining loss is $8,000. You can then apply $3,000 of that against your taxable income, perhaps saving hundreds of dollars in taxes that way. You can then carry forward the remaining $5,000 in capital losses to your 2014 tax return -- and later years, if need be.
The more you know about tax rules, the more strategic you can be and the more money you can save. For example, higher-income folks face higher income-tax rates of 33% or more. Short-term gains from assets held for a year or less, are taxed at income tax rates -- so a $6,000 gain could cost about $2,000 or more. But if you have sufficient qualifying capital losses, you can wipe out some or all of that tax obligation. You might also delay selling an appreciating stock for a little while so that you've held it longer than a year and it can qualify for lower tax rates.
Know, too, that you can't just sell a stock for the gain or loss and then buy it back the next day. That's deemed a "wash sale" and doesn't count. You need to stay out of the security for more than 30 days.
There's value in your capital losses in 2014 and beyond, so long as you're mindful of the rules. Your capital losses can shave hundreds or thousands of dollars off your tax bill.