Taxes: Minimizing Investment Losses

It's been a rough year for the stock market. If you've been following your favorites on Inner8, you already know that. Although, really, even those who don't follow stocks know that things have been pretty bad this year. And, to make matters worse, there are a number of stocks -- from Washington Mutual to Lehman Brothers to Fannie Mae are pretty much worthless.

So how can you minimize your losses? I think you know what's coming here:

Writing off investment losses on your taxes

It is possible to take advantage of the tax code in order to minimize your investment losses. BloggingStocks offers a great example of one scenario in which you can write off some of your losses on your taxes:

If you have an investment loss you can write off up to $3,000 (up to $1,500 if you're married filing separately), but you first must offset any capital gains with your losses. For example, suppose you sold your stocks in 2008 with a total capital gain of $500 for the year and a total capital loss of $5,000. You would write off the first $500 of the capital loss against the capital gain and have $0 capital gains this year. Then you could write off the next $3,000 against your regular income. You would then have $1,500 left over. You could then carry over that $1,500 for write offs on your 2009 taxes.

IRA Losses

Another issue affecting many includes losses from retirement accounts. I recommend that you hang in there. Delay taking distributions if you are close. I have a long time horizon, so I've actually upped my retirement account contributions. I'm getting some great bargains that should hopefully pan out later on down the road. But if you are adamant about pulling out, it is possible to claim IRA losses on your taxes as long as you cash out all the same type of IRAs. Hint: This will work better with Roth IRAs. These are itemized deductions on Schedule A.

Since I am neither a tax professional nor an investment professional, I recommend that you talk with a tax adviser or an accountant before deciding what to do. Besides, these professionals can usually help you find ways to minimize your taxes in ways that are well worth the fee you pay.

Here are some additional resources from the IRS:

• Publication 590
• Publication 550: Sales and Trades of Investment Property
• Section 165