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Using capital losses to cut your tax bill

The stock market has been on a crazy run in 2014. When its wild swings up and down ultimately shake out, many folks will find that their portfolios are going to worth much more.

Some folks took their gains earlier in the year. Others are cashing in those positive holdings as part of their year-end tax planning.

Bullish stock market

Either way, they'll face taxes on their investment profits.

Granted, the tax rate for long-term capital gains generally is lower than a taxpayer's ordinary income tax rate: 20 percent for higher earners (those in the top tax bracket), 15 percent for most middle-class investors, and no tax at all for folks with capital gains and whose income falls in the 10 and 15 percent tax brackets.

Still, if you can reduce your taxes, even relatively low taxes, you want to do so.

One way to accomplish this lower-tax goal when it comes to investments is by harvesting any tax losses.

This essentially is selling an asset that's lost value. You can use that loss to offset any gains. Just be sure to harvest your tax losses by the end of the tax year.

Extra NIIT attention: Tax loss harvesting has taken on a new urgency in recent tax years among wealthier individuals who are facing the added net investment income tax (NIIT).

The NIIT took effect in 2013 and imposes an additional 3.8 percent tax on either a filer's net investment income or the amount by which a taxpayer's modified adjusted gross income exceeds a certain threshold amount.

The NIIT kick-in levels, which are not indexed for inflation, are:

  Filing Status

  Threshold Amount

  Married filing jointly


  Married filing separately




  Head of household (with qualifying person)


  Qualifying widow(er) with dependent child


What is considered net investment income? It generally includes income such as interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.

It does not apply to home-sale profits, which already are exempt from taxation when they are $250,000 or less for single home sellers, twice that amount for married joint filers.

Not just for the rich: While the stock market's strong 2014 performance has many investors rushing to lower their taxable -- and net investment income taxable -- gains before 2014 ends, tax loss harvesting is not just for the rich.

Neither is it solely for folks who have capital gains.

In fact, tax loss harvesting can pay off even if you have no capital gains upon which taxes are due. You can use up to $3,000 in capital losses each year to offset your ordinary income.

The Dec. 17 Weekly Tax Tip has details on how capital losses can help cut your tax bill.

Note that when capital gains and losses are involved, you'll face extra tax forms and calculations. But it's worth the work to reduce what you owe Uncle Sam.

And don't think about getting stock loss sneaky. You can't just sell an asset to create a tax loss, then buy it right back. The wash sale rule, which is discussed in the tax tip, prohibits that.

The infographic below from the social investing website SprinkleBit also hits on the highlights of capital gains, losses and taxes.


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