If you and your domestic partner each have your own investments and you have enough income such as wages or self employment income that could be offset by these losses, then this technique may generate a tax savings ranging between $660 to 2,280 depending upon your tax rates and whether you qualify. I will also explain how the wealthier member of the family can help start this strategy through gifting seed money to the less wealthy member.
We all know that the stock market fluctuates up and down. In the down time, would not it be nice to sell the losers to generate a tax loss and then reacquire the stocks at the lower price? The cost would be nominal for such a technique: the cost of the stock broker commissions and any transaction taxes of $30 or so. The tax savings for the above loss could be high ( ranging from $330 to 1,140 per year, depending upon your tax rates ) .
Well, Congress caught wind of this technique and imposed significant restrictions on implementing this technique solo or through family and other related parties. Now, if you sell your stock and acquired that same stock within 30 days before or after the sale, you are denied the deduction for the loss. Even if you sold the stock and a "related party" reacquired the stock, you would be denied a loss. The same loss would be denied if the related party sold the stock and you reacquired it. A "related party" includes ( but is not limited to ) your legally married spouse, a son or daughter, an adopted child, a parent, a sibling or your IRA. It also could include a trust, partnership or corporation of which you hold an interest.
Could not two domestic partners each utilize this technique? In certain circumstances, they certainly can! You can sell your loser stock and your partner could reacquire that stock while your partner sells his or her loser stock and you reacquire his or her loser stock. There is no change in the investment holdings of the overall family except for the nominal transaction fees and taxes. Now your family's combined tax savings ranges between $660 to 2,280 per year depending upon your tax rates. Hence, every year, such a technique could be adopted and form an annual annuity of sorts.
Note that the losses are not unlimited: Only a net $3,000 of capital loss is allowed to offset ordinary income such as wages, rental income, taxable retirement income, dividends, interest income and self-employment income. I say "net" because if you had any capital gains ( e.g., gains generally from other stock sales ) , you could sell extra loss stock to offset those capital gains.
Now perhaps you are the bigger breadwinner and your partner does not have enough assets to invest to implement this technique. You can gift your partner money, up to $13,000 in 2010 without having to file a gift tax return. Please note that if you give your partner a new car for Christmas or your estate planner has been utilizing a gifting strategy, you may already have used up some or all of the $13,000.
It bears repeating that some estate techniques that form legal relationships between you and your partner may prevent you from utilizing this technique. For instance, the creation of a grantor-beneficiary relationship ( e.g. formation of a trust ) could deny use of this technique. That does not mean the estate planning tactic was bad since such legal entities can protect property rights between you and your partner that you would be entitled had you been allowed to legally marry ( recall one of my prior articles ) .
Nevertheless, such limitations re-emphasize the need for a holistic tax return preparer who understands estate, gift and income tax planning consequences. As always, you should seek professional guidance to have someone carefully examine all relationships between you and your domestic partner before endeavoring on this or any course of action.
Thomas H. Franklin holds a CPA and a Masters of Science in Taxation degree from Northern Illinois University. His practice specializes in advising same sex and other unmarried couples on tax and other financial matters. As required under Circular 230, this written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. PLEASE SEEK A TAX PROFESSIONAL'S ASSISTANCE BEFORE ENGAGING IN ANY TAX PLANNING. You can look on his Web site, www.thomashfranklin.com . His e-mail is email@example.com and he welcomes all comments.