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November 13, 2008


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I'm surprised that the WSJ didn't mention anything about 30-day wash sale rules for #2. You can't sell a stock and claim the capital loss and still buy it back within 30 days. I'm not a tax attorney or anything, but I would definitely consult one to make sure you can actually claim the loss if you're trying to significantly reduce your tax burden.

Never mind, just clicked on the original link--they are suggesting this as a way to harvest capital gains, which don't have wash-sale rules. I wish I was sitting on big paper profits!

#7 is horrible advice. I don't care if it's a tax deduction, it's just asking for trouble. It's stuff like this which keeps Americans stuck in the cycle of debt.

#2, Their idea here is for capital GAINs only. The WSJ article does mention the wash sale rule but that rule only applies to losses. The idea from WSJ is to sell stocks that have appreciated and pay the tax gains now so that you are paying a relatively low capital gains tax. Say you have stock that has appreciated $100k. If you sell it now you pay 10-15% capital gains rate. But if you believe capital gains may increase in the future you could be paying a higher tax rate on that gain. So if you sell today you basically 'lock in' the relatively low current capital gains rates. But its still risky, cause capital gains may not go up and you're undercutting your investment. Lets say you've got $100k in appreciated assets. Lets also assume that capital gains are 15% now and will increase to 25% in 5 years. If that invsetment grows +50% in future years. If you sell now you pay $15k in tax and then rebuy the stock with the remaining $85k and in 5 years you've got $127.5k. If you sell that you'd then pay the 25% rate on the appreciation for a a total of $106,875. If you instead held on to your initial $100k you' have $150k and owe 25% on all of it for a tax bill of $37.5k leaving you $112.5k. In this example you'd come out ahead even paying higher 25% tax rate in the future. This is because the investment grew well and you didn't have as much of it after paying taxes. If the investment didn't grow at all then you'd come out ahead by paying the lower tax rate now and avoiding the higher future tax rate. It would be 15% of $100k versus 25% of 100k for a $10k difference. So for this idea to work capital gains have to go up AND your investment has to not grow significantly. If you don't expect your stock investments to grow significantly then why are you invested in them? I would only think of this if a capital gains increase were planned and a known factor and you could sell the stock now to avoid it.

#7 is bad advice. Given todays real estate situation, the state of the stock market and peoples job stability its just reckless to be telling people this. Even in good times the idea of borrowing against home equity just to reinvest it is a risky proposition. Today in bad times its just asking for trouble.


Municipal bonds are indeed great right now. I just invested 10K in one AAA issue and one AA issue NY city bonds with tax-free yield-to-maturity of 5.36% (coupon rate 5.25%) on AAA bond that matures in 2019 and 5.3% (coupon rate 5%) on a AA bond that matures in 2024. AAA was a slightly better deal since I bought it a couple of weeks ago when the yields were better. Since I live in NY state the interest is free from state taxes as well as from federal, so to me it is almost the same as 8% taxable. I'll probably buy more municipal bonds with different maturity dates - still keeping to AA and AAA - when one of my CD matures next week. I am also looking at a close-end municipal bond fund, but the loss of the ability to simply hold to maturity when the bond values drop is a minus. Also the fund has some lower rated bonds. While the rate is higher because of that I am not sure if I want any municipal bond below AA now.

Some of my stocks still have gains, might sell some.

Will pass on 7 as well. I can see how it can make sense if you expect high inflation, have enough money that you can always repay the loan when it starts to make sense (e.g. if we get deflation and lower returns) and you can invest the money risk-free and get higher return. The question is - can you really invest the money without risk and get higher returns than the loan rate? I sure have no clue how to do it.

I have another one. If you're paying off student loans pay only the minimum due. Most people have them locked into very low rates and also the interest you pay can be used to offset taxable income and you don't even have to itemize.

I just realized I made a math error in my example above. When I say $106,875 it should have been $120,625. So actually in that scenario you'd come out about $8k ahead by selling now at the lower tax rate. Still it seems like a hokey way to do things and you are betting that capital tax rates will go up and theres no guarantee of that.


Jim, good think you pointed out the math error. The thing is, higher capital gains taxes are indeed quite likely. Obama has stated he wants to raise capital gains taxes to 20% for those makign more than 250K a year.

So if you make more than that, prepare to be uber-taxed by the next administration. I don't want to get political here, since this post is not specifically political, but the fact remains that the next administration does want to raise capital gains taxes.

I would add contribute to a Roth IRA if you look at it from the perspective of how to deal with rising taxes in the future...

Does your #3 mean that you do not contribute to a Roth IRA? Or do you max out both that and your 401k? Even if you wife doesn't work, that's $25,500/yr - good for you!

follow advice from the WSJ, get real, they are the lap dogs of the fat cats!

Rich said:

I have another one. If you're paying off student loans pay only the minimum due. Most people have them locked into very low rates and also the interest you pay can be used to offset taxable income and you don't even have to itemize.

Um, NOPE, wrong.

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