You can write off losses on a range of items from 529 plans to Roth IRAs. For those
hurt by the declining market values, one of the few remaining pleasures is harvesting
losses for tax deductions. If you realized losses last year, the deductions can go on your
2008 tax return, by amending. Otherwise, consider acting now for a 2009 write-off.
Examples include:
529 COLLEGE SAVINGS PLANS. If you have a 529 account with a current
balance below the amount you invested, you can close the account and pull out the
remaining cash. If you invested, say $20,000 but your account is down to $12,000 you
could walk away with an $8,000 loss. That loss is considered a miscellaneous deduction.
Other deductions in this category include investment expenses and un-reimbursed
employee business outlays. After you add up all your miscellaneous deductions, you can
deduct the amount in excess of 2% of your adjusted gross income.
Say your AGI this year is $200,000. The 2% threshold is $4,000. If all of your
miscellaneous outlays, including your 529 plan loss, equal $11,000, you can take a
$11,000 deduction. However, the deduction will be worth less or nothing if you owe the
alternative tax. You can't take this and most types of miscellaneous deductions against
the AMT.
If you liquidate a 529 account and get back less than you put in, wait more than 60 days to
reinvest the proceeds in a new 529 account. This advice comes from Jim Van Grevenhof,
senior tax analyst for the Tax and Accounting business of Thomson Reuters. If you
reinvest sooner in a 529 plan, the IRS won't allow you to take the write-off.
And stay clear of a potential wash sale violation. If you invest the liquidation proceeds
during the 60 days, don't put the money into anything substantially identical to the
original investment. It is easier and safer to simply park the proceeds in cash for 60 days.
ROTH IRAs. The rules here are similar to those for a 529 plan. To get the tax
loss, you must withdraw all of the money you have in any Roth IRA. But the potential
negatives can outweigh the one-time tax benefit. There is the hassle factor, for one.
If you have more than one Roth, you must close down all of them even any that do not
have a loss or whose loss you don't want to take. Why? The IRS treats all your Roth
IRAs as one pool of money. Going this route and claiming the Roth IRA-loss deduction
can also be costly. Suppose you invested $30,000 in one or more Roth's. Now the
balance is $19,000; you have lost $11,000 and you have paid the tax on the $30,000.
Now, if you are under the age of 591/2 and the Roth account is not at least five years old,
you risk getting hit with a 10% penalty. Also what about putting your assets back inside a
Roth, where earnings can grow tax-deferred? If you want to open a new Roth, wait until
the next calendar year. That way you will avoid triggering current year-end statements
from the financial firm holding your Roth, says Ed Slott, who publishes the IRA Advisor
newsletter.
The IRS could misinterpret such paperwork to mean you did not really close your Roth
account. And, wait the 60 days after closing your Roth account before opening a new
one. Again, such miscellaneous deductions over 2% of your AGI can be written off; but
they won't reduce your AMT obligation.
Can you deduct a similar loss from a traditional IRA? Probably not, Slott says. "you can
deduct an IRA loss only if the amount you get from closing your IRAs is less than your
basis" A Roth IRA holds after-tax money so all of your contributions provided you with
basis. But the IRS does not treat pre-tax contributions to a traditional IRA as basis for
this purpose. So you cannot take a loss on a traditional IRA built with deductible
contributions.
Nondeductible IRA contributions are different. You can get a miscellaneous deduction if
the amount you get from liquidating all your traditional IRAs, including those with
deductible contributions, is less than your nondeductible contributions.
WORTHLESS SECURITIES. The capital loss rules also apply when securities
you own become totally worthless. A stock or bond that you own will be considered
worthless when it has n liquidation value and no reasonable hope of providing any value.
Suppose a company is being liquidated in bankruptcy and the shareholder equity will be
wiped out. That's the sign the stock is worthless and you can claim a capital loss on your
tax return. Think GM.
CALL ON US. This publication is issued as a service to our clients and friends.
This intellectual capital is of general nature and should not be acted upon without
professional guidance. So if you know someone that is looking for a way to save taxes
and avoid the IRS, call me at (702) 642-8953 or write me at isueirs@aol.com. No
Exceptions. No Conditions, No Time limit. No IRS.
