Investment losses can add up to substantial tax-time savings

Betty J. Neal is a certified financial planner and investment representative for Edward Jones Investments.

If a person's investment goals are long term sending children to college, planning a comfortable retirement or providing a legacy for the next generation then adhere to a long-term investment philosophy.

But, a buy-and-hold strategy doesn't necessarily mean owning a stock forever. At some point, an investor may decide to sell a stock because it no longer meets his diversification needs, or because the underlying company has lost its competitive position within its industry. And, on occasion, an investor might sell a stock because its price has fallen so far that it may never recover.

Whatever the reason for selling a stock, an investor will want to get as much benefit from the losses as possible.

Fortunately, we've got an ally the U.S. Tax Code. Investment losses are tax-deductible, to a point. An investor can use capital losses to offset any capital gains, plus up to $3,000 of other income, including earned income.

So, for example, if an investor realized a $2,000 capital gain this year from selling stocks or other appreciated investments, he could write off up to $5,000 in losses. And he can carry forward any "excess" losses for future years.

In fact, because so many investors have realized more losses than they can write off in a single year, Congress is considering increasing the amount of losses that can be deducted annually.

What happens if an investor would like to write off some losses, but still wants to hang on to the stock that caused them? If the investor sells the stock, and then buys it back within 30 days, he can't deduct the losses, because he'd be violating the IRS' "wash-sale" rule. He could sell the stock, wait 30 days, and then repurchase it but he'd run the risk of having the stock's price rebound in the meantime.

As an alternative, a person could sell the stock and immediately reinvest the proceeds in a similar company. As long as he's not investing in a stock that is "substantially identical" to the one that was sold, a person can generally avoid the wash-sale rule.

Nonetheless, consult with a tax advisor and investment professional before making any of these types of moves. An investor never wishes for stocks to decline, but, if it happens, he can use the losses to brighten tax season a bit and that's always good news.