Monday, December 22, 2008

To Harvest Stock Losses or Not...

I purchased Turbo Tax Deluxe from Costco for $49.99 (plus tax) this weekend and I gave it a whirl. I don't have my W-2's or my 1099's yet, but I always try to estimate my potential tax liability in December so that I can start saving up any money that I need to pay by April 15th.



With the exception of last year, I've been fortunate to break even or nearly break even with my taxes (i.e., tax liability less than $100 for both Federal and State taxes). Last year I owed $1,142 in State and Federal taxes due to the fact that I stopped contributing to my 401k to increase revenue and to bring my debt under control. I also sold a bunch of my company stock for a profit, again to pay down my debts.

This year, I contributed to my 401k again which should help reduce my tax liability. But I also sold 14 shares of my company stock for a nice profit.

At this time, Turbo Tax doesn't have my State Forms available yet. (Estimated date of availability 12/30/08.) But based upon my guesstimate of my income and taxes paid, I'll owe about $500 solely on my Federal taxes! If I owe on my Federal, I'll definitely owe on my State taxes. Assuming the $500 estimate is correct, I may owe another $375 in State taxes. I currently have $350 set aside for paying taxes. Like everything else in my life, looks like I'm short yet again. (Story of my life!)

But, if I sell the ETFs (stock ticker: VTI, VEU and TIP) that I purchased in March 2008 for a short-term loss, my Federal tax liability goes down to about $386 and the sales proceed will help gap the estimated tax shortfall. This may be a viable option but I'll need to act before 12/31/08.

To be frankly honest, I wouldn't mind taking the loss to reduce my tax liability. I hate the fact that every time I look at my investments, I'm reminded of the massive losses of the past few months. I can always re-purchase these ETFs at the lower price after 30 days anyways.

But at the same time, I purchased these ETFs with a long-term horizon in mind. I could keep it and dollar-cost average by purchasing additional shares. Maybe I should just suck it up and try to find a way to pay my taxes without selling my ETFs? Dilemmas, dilemmas.

4 comments:

Miss M said...

What brokerage are you using? Trading costs would be one concern, plus any moves in the market for the 30 days you are out. You could also rebuy immediately into different investments if you're looking to rebalance or otherwise adjust your portfolio. I would probably do it, as long as you can keep trading costs down. Maybe just sell one fund...I hate paying taxes. I set up my withholding so that I usually owe a bit every year.

Shtinkykat said...

I have my ETFs at Scottrade so it'll cost me $21 to sell them. As you point out, there are other opportunity costs in selling them. I'm leaning towards not selling and just setting aside more money until April to pay my taxes. Oh, I hate myself for planning so poorly. :-(

Sharon Rose said...

Hi there-hope you find a solution my dear. Our tax system here in the UK is a lot different to yours!!

Ms. MoneyChat said...

1. If you purchased the ETF's with a long term horizon then I'd stay with that game plan unless the plan no longer makes sense.

2. I'd put money aside for the taxes assuming doing so won't put an undue burden on your monthly budget. If so, nix point 1 and sell the ETFs.