Tax
Tip of the Week – February 24, 2009: Deducting Bad Investments
This past year has
been a brutal one for the stock market. For many taxpayers, their
retirement and brokerage accounts have been cut in half and there
seems to be no end in sight to America’s financial system’s
problems.
A common question I
get from my clients is: What can I deduct if my investments go
down? The answer depends on the type of investment account you
have and whether you still hold the investment.
To claim a deduction,
the investment (assuming it is a stock or mutual fund) must be
held in a taxable brokerage account to be eligible to write off
as a loss. This means that all of us that have seen our retirement
accounts go down (like IRA’s SEP’s, or 401K’s)
are pretty much out of luck as to claiming a loss in those accounts.
The IRS’s theory is that if a gain in the account would
be non-taxable, a loss in the same account is non-deductible.
So let’s assume
for a moment that we are looking at a loss in a regular (non-retirement)
brokerage or mutual find account. In that case, a bad investment
can only be deducted in the year it is sold or becomes worthless.
If you sell the investment it is easy to calculate what your gain
or loss is. Your gain or loss is determined by subtracting your
purchase cost from your sales price. A tougher situation is the
one where you believe the investment has become worthless. That
is the situation for clients of Bernie Madoff in New York or for
clients of Stanford Financial Group in Houston. In that situation
the year of loss deductibility may depend on the outcome of Federal
investigations or Bankruptcy Court rulings. Due to the difficulty
in assessing the true time the investment became worthless, it
is a good idea to get the help of a tax professional when claiming
this type of loss.
Call
us today at 713-661-1040 and let us put our tax experience to
work for you. Protecting your bottom line is our top priority!
Tax
Tip Of The Week Archive