What You Should Do With Your Capital Losses Before The End Of The Year

Bernie Kent for Forbes writes: We are at the time of year when many taxpayers are contemplating year-end tax planning for capital gains and losses. Even though we have experienced six strong years of stock market returns, the volatility of the equity markets in 2014 has created some opportunities for tax loss harvesting. Also, there are taxpayers who still have capital loss carryforwards left over from the severe market decline in 2008-2009.

Ordering rules for using capital losses

- Short-term capital losses must first be used to offset short-term capital gains. If there are net short-term losses, they can be used as an offset against the net long-term capital gains.

- Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.

- Long-term capital gains are taxed at rates of 25% (real estate recapture) or 28% (collectibles) instead of the usual rate. Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.

- Capital losses in excess of capital gains can be used to offset up to $3,000 of ordinary income.

- Any remaining unused capital losses can be carried forward and used in the same manner as described above.

- Unused capital losses expire in the year of the taxpayer’s death, to the extent they remain unused on the final income tax return. On a joint tax return, each spouse’s capital losses must be tracked separately for purposes of this rule.    [snip]/  The article continues @ Forbes, click here to continue reading....