Year-End Tax Planning in a Volatile Financial Market

November 11, 2008 The Legal Intelligencer

With the turmoil in the financial markets, many investors have incurred large, unrealized losses in their investment portfolios and significant declines in the value of their real estate holdings. Accordingly, careful year-end tax planning is necessary to take maximum advantage of these losses. In addition, the decrease in asset values may present unique gift and estate planning opportunities. Generally, the sale or exchange of a stock or bond by an individual investor to an unrelated party for an amount less than the purchase price of such security gives rise to a capital loss. Such losses are deductible in the year of the sale or exchange but only to the extent of capital gains recognized in the taxable year of sale, plus $3,000 ($1,500 for married individuals filing separately). Capital losses in excess of this limitation may not be carried back to prior taxable years but may be carried forward for an unlimited number of taxable years until fully utilized.

As a result of the limitation on the ability to deduct capital losses, taxpayers should review their portfolios to determine if there are any capital gains, which could be recognized before year-end which can be offset by capital losses incurred either in 2008 or carried forward from prior years. Although qualified dividends payable by a C corporation are taxed at the favorable capital gains rate of 15 percent, such dividends are not treated as capital gains which may be offset on a dollar-for-dollar basis by capital losses.

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