We’ve discussed before on these pages the benefit of tax-loss harvesting. Briefly, this is where you have a taxable account, holding stocks, bonds, or mutual funds, and (as was the case this past year) the market declines, leaving your holdings in a loss situation. Once you sell the holding, you have realized the loss, which enables you to take advantage of the tax law and deduct those losses, first against any gains in your account(s), and then at a rate of $3,000 per year against ordinary income.
As an example, say you purchased a mutual fund for $10,000 in late 2007. Over the course of the year in 2008, your mutual fund’s value reduced to $5,000. If you sold the holding, you would have a loss of $5,000. Using the tax law to your benefit, you are able to reduce your ordinary income by $3,000 for 2008, and carry over the remaining $2,000 for writing off against the following year’s income. It is important to note that the loss is first used to offset any capital gains you may have in your account before you can use it to reduce ordinary income.
Now, the bad news is that you can’t make this move for 2008 – you must make your sale of the holding and realize the loss before the end of the tax year. The good news is that you can sell any loss positions (and let’s face it, who doesn’t have a loss position?) that you currently hold and then take this reduction in income for your 2009 taxes, which you’ll file a year from now. It’ll be a nice surprise for you (if you’ve forgotten about it) when you get ready to file in 2010.
This is one of the many benefits of holding at least a portion of your investments in non-qualified or non-IRA accounts. Because in your IRA or 401(k) plan, losses you sustain are of no tax consequence. Likewise, gains that you experience, along with the funds that you “hid” from taxes in earlier years, will be taxed at ordinary income tax rates – which are presently higher than the capital gains rates assessed against your taxable account gains. And I don’t expect that the ordinary income tax rates are set to decline appreciably at any time in the near future, given the deficit spending being introduced at an alarming pace these days.
Click the link to pick up a copy of An IRA Owner's Manual or if you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.
I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
My other book, 
And if you've come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed "advisor's advisor".