2012 Woes: Investors' Deductions

Speaking of taxes in relation to handling a portfolio, there's much confusion in the average stockholder's mind over the question of investment-related tax deductions. A recent local court case, for instance, points up the frequently forgotten rule that if you spend money to inspect a possible investment - as opposed to one you already own--you cannot deduct the expense. In this case, the taxpayer tried to deduct his travel expenses. All he could do, it turns out, was to add these items to his cost basis - if and when he actually paid his money to make the investment.

It's understood that you can deduct the cost of a safe deposit box - but you can go further. Fees for investment advice are deductible, and this is true whether you pay for counselling alone or full portfolio management. State taxes on a stock sale are deductible which some people miss.

Not only can you deduct the cost of travel to inspect investment property you own - assuming you have a valid business purpose - there are also some occasions when you can deduct for travel to an annual meeting of a company in which you own a sizable share. This, though, is a gray area; you should be able to prove that the trip was necessary not just an outing.

A pitfall: IRS will clamp down fast if it discovers that you are deducting brokers' commissions or any expenses related to tax-exempt bonds. The courts go far to protect the rule that the interest you pay on a loan to buy tax exempts is non-deductible. In a 2004 Tax Court case, an owner of municipal bonds borrowed at a bank, and - because he could have sold the bonds instead - part of his interest deduction was denied.

For a good, straightforward review of most types of deductions see J. K. Lasser's Your Income Tax, by Simon Shaw .

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Take It Easy When Selling For A Tax Loss

The techniques of investments fill volumes. Here is a capsule review of some of the more widely used methods, starting with year-end tax selling.

The tax selling idea, of course, is to "take" a paper loss by selling and then use it to offset capital gains taken earlier in the year. Or, conversely, you can take gains to offset earlier losses. Either way it's a tax saver. But either way it can also be a considerable abuse of assets. "It's usually foolish to tear into your portfolio for tax reasons alone," says a Wall Street adviser, "but many people do." So plan ahead before you make a year-end sale.

Let's say that you want to take a tax loss, but you're uncertain about what... see: Take It Easy When Selling For A Tax Loss