Losing money on an investment can be painful, but there is a positive side, you can use the losses to lower your tax bill. In fact, cutting your losses instead of waiting for a bad investment to recover can be a savvy tax-saving strategy. Here's why: each dollar of losses offsets an equal amount of taxable capital gains, you can also offset taxes on up to $3000 of ordinary income ($1500 if you're married and filing separately) if your losses are high enough. And if you still have losses left over, you can save them and use them to offset taxes in future years.
Paper losses don't count. To use this strategy, you have to actually sell an investment, such as a stock or fund, for less than you paid. That's why it makes sense to periodically purge losing positions that look hopeless. "You want to do this throughout the year," says Janice Johnson, a tax consultant in New York City. "You don't want to be caught selling at the end of the year when prices may be depressed."
Other losers I would like to get tax savings for:
1. All the time I've spent watching reality TV (except The Nanny & Wife Swap)
2. "The Heartbreak Kid" starring Ben Stiller
3. My last blind date
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