Disclaimer: The Defensive Coordinator is here to give free tax advice, not to engage in the practice of law or the practice of accounting. Hopefully, he can help you be more efficient in your dealings with the IRS as well as your legal and accounting advisors. You should consult competent tax counsel regarding any tax decision that you make. You got it?

About the Defensive Coordinator: Our Defensive Coordinator is a JD/CPA playing minor league ball for a "Big Five" accounting firm and in the pros as an estate tax strategist for 20+ financial planners. You have a question? Ask the Defensive Coordinator.

Year-End Income Tax Tips:

I got some bad advice from another website (I should have listened to BPS) and I’m in a loss position. Should I sell now to take the loss for my 2000 taxes?

: It may be prudent to do so but be careful. If you like the stock and would like to retain it in your portfolio, beware of the wash sale rules. Essentially, the rules state that you cannot take the loss if you acquire "substantially identical" securities 30 days before or 30 days after the sale (including put and call options for the same stock). Essentially, Section 1091 of the Code treats the seller as if the transaction didn’t occur with the new securities tacking the holding period and basis as the old security.

How do I know if I could deduct the loss?

Generally, the capital gain netting rules come down to this: Combine your short-term gains with your short-term losses. Your result is a Net Short-Term gain/loss. Now do the same for the Long-Term gains/losses. Combine these two Net amounts. If both "Nets" are gains, the short-term gains will be taxed as ordinary income while your long-term gains will be subject to the reduced rates (probably 20%). If you end up with more capital losses than gains, then you can claim a deduction of up to $3,000 ($1,500 if married filing separately). Any excess loss is carried forward to future years and retains its character as short-term or long-term (so that it will reduce next year’s long-term gains before reducing short-term gains).

Year-End Estate Tax Tip:

Have you used your gifting allowance this year? Each year, the IRS allows you to make a gift of $10,000 of value to each and every person you choose. This amount becomes $20,000 of you’re married and your spouse agrees to split the gift. This may sound insignificant but let’s look at an example. $20,000 per year gifted to 5 people (children) for 5 years amounts to total gifts of $500,000. At a growth rate of 8%, this amount has a value of $930,000 at the end of 10 years. If you die with a sizeable estate in that year, you’ve effectively removed $465,000 (50% tax) out of the government’s pockets and into your children’s (or a trust for their benefit).

Don’t know what to gift? Why not a subscription to BPS and their own trading account. Or, as an incentive for fiscal responsibility, why not match their own contribution into their own trading account? Either way, understanding the markets and the financial analysis by Stock Jock will be an invaluable skill.

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