The corn’s in, but the harvest isn’t over. The tax law taxes capital gains for almost all individual taxpayers when you sell an appreciated asset, even though it shouldn’t. Still, if you’re like most of us, not everything you buy goes up.
The tax law allows individuals to deduct capital losses when they cash out a money-losing investment, up to the amount of capital gains plus $3,000. That means paying capital gain taxes is optional to the extent you have unrealized capital losses in your taxable portfolio. That’s a silly option to exercise. Here are some thoughts on loss harvesting:
– You have to take the loss in a taxable account. A loss in an IRA or 401(k) plan doesn’t help you.
– Normally the “trade date” is the effective date for tax purposes, so you can sell a stock as late as December 31 this year and still deduct the loss on your 2015 1040.
– If you have a loss on a short sale, the tax law treats it as closing on the settlement date, not the trade date, so you can’t wait until the last minute to close a short sale to get a deduction. (See also Russ Fox, Harvesting Capital Losses: Act Quickly on Shorts!)
– You don’t need to overdo it. You can deduct your capital losses only to the extent of your capital gains, plus $3000. But if you do overdo it, individual capital losses carry forward indefinitely.
– Long-term losses can offset short-term gains, and vice-versa.
– Harvesting losses helps taxpayers subject to the Obamacare/ACA Net Investment Income Tax to the extent it helps for regular taxes.
– Watch out for the wash sale rules. If you buy the same stock within the 30 days preceding or following the sale of a loss stock, your loss is disallowed. This is true even if you sell from a taxable account and buy in an IRA, according to the IRS.
This is another installment of our 2015 year-end planning tips series running through December 31.
Related — weekend tax tips:
Altaring your tax planning
Keep on giving! A high-end tax planning tip.
1916 Spaulding by The editors of Horseless Age. Public Domain via Wikimedia Commons.
Tax Credits as a trap. The Sunday Des Moines Register this week told the story of a tax credit deal gone awry, leaving the small college town of Grinnell, Iowa in a financial pickle.
Grinnell once housed Spaulding Manufacturing Company, one of many small early Midwest automakers. The Spaulding story is told in my college buddy Curt McConnell’s fine book, Great Cars of the Great Plains.
There is only one known surviving Spaulding vehicle. It was to be a crown jewel of a transportation museum to be built around the dilapidated remains of the old Spaulding plant. But it hasn’t gone well, according to the Register:
Three years after it opened, the Iowa Transportation Museum has hit a dead end, losing its building to foreclosure and leaving the city of Grinnell on the hook to repay more than $4 million in federal aid for the project.
The museum, which had operated in a renovated portion of the old Spaulding manufacturing plant in downtown Grinnell, closed in October, unable to pay its mortgage to Iowa City’s MidWestOne Bank. The bank even took possession of the museum’s crown jewel, a rare 1913 Spaulding automobile built at the Grinnell plant.
It sounds as though the business plan of attracting auto tourists to Grinnell was hopelessly optimistic, but it was tax credit failure that finished things off:
The museum built its budget around receiving $900,000 in federal historic tax credits that never arrived. A 2012 federal appeals court ruling about a real estate project in New Jersey shook up the market for historic tax credits. A subsequent IRS memo explaining the ruling said, essentially, that investors should not stand to profit from historic tax credits without shouldering some of the risk. As a result, investors backed away from historic tax credit projects.
“That is where things really started to come apart on us, and it was just kind of a chain reaction from there,” Brooke said.
This is where I find myself puzzled. By their terms, federal historic rehab credits have never been transferable. A transferable tax credit can be sold by the original recipient to cash in on a tax break too big to use by itself. Tax credit middlemen tried to make them transferable by setting up “partnership” structures where investors were nominal partners, but really were in it only for the tax credits, with economic gains and losses from the rehab project allocated elsewhere.
To my surprise, the Tax Court had gone along with that structure, but the Third Circuit Court of Appeals reversed them in Historic Boardwalk Hall LLC (CA-3, No. 11-1832). The court held that because the tax credit investor didn’t share meaningfully in either potential income or loss from the project, it wasn’t a partner eligible for tax credits.
That was the risk I had always seen in these deals, and it came home to Grinnell.
The Moral? When it takes tax credits to make a deal work, it doesn’t really work. It’s just crony capitalism.
Enjoying a short Des Moines winter commute.
Robert D. Flach has started a new organization, TAX PROFESSIONALS FOR TAX REFORM. “We believe that the one and only purpose of the Tax Code is to raise the money necessary to fund the government.” A worthy cause.
William Perez, Understanding Canceled Debt Income and Taxes
Kay Bell, Uncommon charitable gifts still provide donors the typical tax deduction. A discussion of property donations. “As with all tax deductible donations, you also need to make these more uncommon ones by Dec. 31 in order to claim them on this year’s taxes.”
Paul Neiffer, Farm and Ranch Provided Housing. A partnership, sole proprietor or S corporation cannot provide and deduct employee related housing for any of its owners (unless they own less than 2% AND are not related to any other owners).”
TaxGrrrl, 12 Days Of Charitable Giving 2015: Fender Music Foundation
TaxProf, Hemel: Taxes To Cause Vanguard Fund Fees To ‘Quadruple’? Not So Fast. We know the nosy busybodies would punish Vanguard’s small saver base with higher fees to feed the federal black hole. The only dispute is how much.
Tax Policy Blog, Apple CEO Tim Cook: We Need a Tax Code for the Digital Age. “The solution to ‘profit shifting’ is not a new patch to an already complicated tax code. The solution that the U.S. needs is a comprehensive tax reform that reduces both the corporate tax rate and the complexity of the entire tax code.”
TaxProf, The IRS Scandal, Day 961, Day 962, Day 963. The Day 961 post notes the obvious problems of giving one of the most aggressively secretive agencies power over passports. Day 962 inadvertently confirms one of the driving forces of the IRS scandal — ongoing bitterness over the Citizens United decision preventing bureaucrats from selectively restricting free speech rights.
Robert Wood, More Calls To Impeach IRS Chief Over Targeting, Bonuses, Obstruction
Stuart Gibson, Unlikely New Year’s Resolutions (Tax Analysts Blog). Like these:
-Citizens of Greece: Pay all the taxes they owe.
-Greek tax collectors: Pay all taxes they collect into the Greek treasury.
Peter Reilly, Did You Hear The One About Bernie Sanders And Kent Hovind Walking Into A Tax Blog? Well, Bernie is evidence of the co-existence of dinosaurs and hominids.