The new year is fast approaching. And you may be waiting with baited breath for tax reform to pass.

If it passes in its current form, the landscape next year will be very different from this year’s.

Many of the deductions that you’re used to – state and local taxes, medical deductions, or even mortgage and property tax deductions – will be limited or eliminated if the current bill passes.

Even things like the deduction for alimony may go the way of the dodo.

But there’s one thing the media isn’t talking about… The new tax plan won’t touch the rules for deducting capital losses or the rules for wash sales.

Many of you are familiar with the rules regarding deducting losses from the sale of securities or investments. It was an unfortunate side effect of the Great Recession.

While you may be familiar with some aspects – such as deducting losses and gains – what about the tax implications of unrealized losses?

Unrealized losses are the losses on stocks that you don’t want to sell because you think they may move higher during the wash sale period. The wash sale rule prohibits you from selling a stock or option (or pretty much any security) for a loss if you buy back a “substantially identical” security within 30 days.

The rule is decades old, and the definition of “substantially identical” is vague. However, buying back the same shares or options is considered substantially identical.

There is a workaround, however. You can buy a different company’s stock or option. This works in sectors where all the companies tend to rise and fall in tandem.

For example, if you take a hit on an oil stock like Exxon Mobil (NYSE: XOM), you can sell the shares and take the loss against any gains you may have accumulated or qualify for the $3,000 capital loss deduction. At the same time, you can buy shares in a company like ConocoPhillips (NYSE: COP) or Chevron (NYSE: CVX) so you don’t miss a potential rally in prices.

The best sectors to do this with are travel, finance and natural resources. It doesn’t work well in sectors where companies’ products move independently of one another. Biotech is a perfect example.

According to the government, tax reform is going to simplify the process for millions of people.

Riiiight.

It’s incumbent upon you to do your homework when it applies to the tax treatment for investments. If you don’t know what the proposed reforms are, you are doing yourself a massive disservice.

This website is a good source of information on some of the major items in the proposed reforms. Always consult with your accountant about your specific situation.

Judge Learned Hand probably said it best: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes.

Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.”

Good investing,

Karim

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Source: Wealthy Retirement