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GOT INVESTMENT LOSSES? MAKE THEM WORK FOR YOU

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If your investment goals are long term — sending children to college, planning a comfortable retirement, providing a legacy for the next generation — you probably adhere to a long-term investment philosophy.

But, a buy-and-hold strategy doesn't necessarily mean owning a stock forever. At some point, you may decide to sell a stock because it no longer meets your diversification needs, or because the underlying company has lost its competitive position within its industry. And, on occasion, you might sell a stock because its price has fallen so far that it may never recover. Whatever your reason for selling a stock, you'll want to get as much benefit from the losses as possible.

Fortunately, you've got an ally - the U.S. tax code. Your investment losses are tax-deductible, to a point. You can use your capital losses to offset any capital gains you have, plus up to $3,000 of other income, including earned income. So, for example, if you realized a $2,000 capital gain this year from selling stocks or other appreciated investments, you could write off up to $5,000 in losses. And you can carry forward any "excess" losses for future years.

In fact, because so many investors have realized more losses than they can write off in a single year, Congress is considering increasing the amount of losses that can be deducted annually. What happens if you'd like to write off some losses, but you still want to hang on to the stock that caused them? If you sell the stock, and then buy it back within 30 days, you can't deduct the losses, because you'd be violating the IRS' ''wash-sale'' rule. You could sell the stock, wait for 30 days, and then repurchase it - but you'd run the risk of having the stock's price rebound in the meantime.

As an alternative, you could sell the stock and immediately reinvest your proceeds in a similar company. As long as you're not investing in a stock that is "substantially identical" to the one you sold, you can generally avoid the wash-sale rule.

Nonetheless, you'll want to consult with your tax advisor and investment professional before making any of these types of moves. You'll probably never wish for your stocks to decline, but, if it happens, you can use the losses to brighten your tax season a bit - and that's always good news.

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