Your Midyear Tax Checkup, Day 2: Sell Investments Strategically

Having hit the midpoint of 2010, we’re doing a week-long spree of tax planning posts this week (check out the earlier one on figuring out if you’ll be square with Uncle Sam). As any tax pro knows, a little foresight can go a long way toward making your next April 15 a little more pleasant.

Today's topic: Investing strategy.

If you sold an investment in ’07, ‘08, or early ‘09 for less than you bought it for — as many people did — you may still have capital losses that you’re carrying forward. If so, you also have a great opportunity to switch up your investments, rebalance your portfolio or simply liquidate into cash without incurring any taxes, says Rob Seltzer. You can apply losses to cancel out gains, which gives you an out: “If you want take some money off the table, you have a painless way of doing it,” he says. So take a look at your portfolio to see if there’s a need to change up or cash out.

But don’t forget too that up to $3000 of losses can be applied to ordinary income per year, and that can be worth a lot in terms of tax savings. So there’s no need to rush to use losses if you don’t have to. Besides, “Any losses carried over will be very valuable in future years, as the tax rates go up,” says Tustin, Calif. CPA Monica Rebella. That's because the long-term capital gains rate is slated to increase to 20% for everyone in the 28% bracket or higher next year vs. 15% now for the 25% bracket and up.

In fact, because of the expected tax increase, Rebella notes she’s advising some retirement-age clients to liquidate more money than they ordinarily would this year, since it will be more costly for them in 2011. Now that’s foresight.

Tune in tomorrow for info on availing yourself of the most deductions you can.

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