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YEAR-END TAX TIP: COUNT YOUR WINNINGS, THEN TAKE YOUR LOSSES

November 24, 2003

It's been a decent year for the stock market. Some folks even have cashed out positions with capital gains. With every silver cloud, though, there is a dark lining - in this case, income taxes.

This is a good time to add up your winnings, and to try to make them go away - at least with respect to the IRS. We can do this by venturing into the dark recesses of our portfolios in search of losers - maybe that Enron stock we bought at 80, or that McLeodUSA stock that looked so promising not so long ago. If a position retains only sentimental value, you can convert it to income tax value by cashing out your losses.

LONG-TERM, SHORT-TERM?

Capital losses can offset capital gains of whatever flavor - short-term losses can offset long-term gains, and vice-versa. Individuals can deduct capital losses to the extent of capital gains, plus $3,000. If you overdo it on your losses, the excess carries forward to next year.

WHAT ABOUT CARRYFORWARDS?

Not a few taxpayers unwittingly prepared for capital gains in 2003 by cashing out large capital losses in 2001 and 2002. If not used already, these losses carry forward to 2003; when evaluating your 2003 capital gain situation, don't forget them.

ABSENCE MAKES THE HEART GROW FONDER...

When you say goodbye to a loss position, brace yourself for an extended separation. The "wash sale" rules say that you can't deduct a loss if you purchase another position in the stock within 30 days - before or after - of the loss sale. If you really think your WorldCom stock will come back, you have to hope it will wait 31 days to do so if you want to deduct that loss.

GAINS: HOLD 'EM OR FOLD 'EM?

If your capital gains are long-term gains - that is, held for over one year - remember that your top effective tax rate is 15%. Iowa has no capital gain break for most assets, so Iowans pay capital gain taxes at rates up to 8.98%. If you have confidence in your portfolio, it always makes sense to hold on and avoid capital gain taxes - especially if you lack losers to offset your gains.

Still, the capital gain rates are low enough to make it easier to close out any of your stocks that seem scary-high; even after taxes, 85% of a capital gain beats 100% of a capital loss any day.

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