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The Error-Proof Portfolio: Don't Neglect Tax-Loss Selling as 2012 Winds Down

Higher future capital gains rates might make losses more valuable, but waiting increases the uncertainty.

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With Bush-era tax rates set to expire at the end of 2012, barring Congressional action, one frequently discussed investment maneuver is capital gains harvesting. The idea, as discussed by financial-planning expert Michael Kitces in this video, is that you sell your winning holdings and owe taxes at today's low long-term capital gains rates--15% for most investors and 0% for those in the 10% and 15% tax brackets. You can even rebuy the same securities right away, but you will have reset your cost basis--that is, in the future, you'll only owe taxes on the amount of appreciation above your new purchase price.

But even while the sexy tax-gain harvesting idea has gained traction of late, that doesn't mean you should overlook that old faithful of year-end tax-planning maneuvers: tax-loss selling. If you sell stocks and funds from your taxable accounts for a loss, you can use those losses to offset your capital gains. And if those losses outweigh any capital gains you've realized during the year, you can use your losses to offset as much as $3,000 in ordinary income on your tax return for 2012. (Any losses you don't use this year can be carried forward to future tax returns.)

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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