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For those stung by the relentless bear market, one of the few remaining pleasures is harvesting losses for tax deductions.

If you realized losses last year, the deductions can go on your 2008 tax return. Otherwise, consider acting now for a 2009 write-off.

Examples include:
529 college savings plans. If you have a 529 account with a current balance below the amount you invested, you can close it and pull out the remaining cash.

If you invested, say, $20,000 but your account is down to $12,000, you could walk away with an $8,000 loss. That loss is considered a miscellaneous itemized deduction. Other deductions in this category include investment expenses and unreimbursed employee business outlays.

After you add up all your miscellaneous deductions, you can deduct the amount in excess of 2% of your adjusted gross income.

Say your AGI this year is $200,000. The 2% threshold is $4,000. If all of your miscellaneous outlays, including your 529 plan loss, equal $11,000, you can take a $7,000 deduction.

But that deduction will be worth less or nothing if you owe the alternative minimum tax. You can’t take this and most types of miscellaneous deductions against the AMT.
“If you liquidate a 529 account and get back less than you put in, wait more than 60 days to reinvest the proceeds in a new 529 account,” said Jim Van Grevenhof, senior tax analyst for the Tax & Accounting Business of Thomson Reuters. If you reinvest sooner in a 529 plan, the IRS won’t allow you to take your write-off.

And steer clear of a potential wash sale violation. If you invest the liquidation proceeds during the 60 days, don’t put the money into anything substantially identical to the original investment.
It is easier and safer to simply park the proceeds in cash for 60 days.

Roth IRAs. The rules here are similar to those for 529 plans. To get a tax loss, you must withdraw all the money you have in any Roth IRA.

But the potential negatives can outweigh the one-time tax benefit. There’s a big hassle factor, for one.
If you have more than one Roth, you must close down all of them, even any that do not have a loss or whose loss you don’t want to take.

Why? The IRS treats all your Roth IRAs as one pool of money.

Going this route and claiming the Roth IRA-loss deduction can also be costly. Suppose you invested $30,000 in one or more Roths. Now your balance is $19,000. You’ve lost $11,000, which can be taken as a miscellaneous itemized deduction.

But if you are younger than 591/2 and the Roth account is not at least five years old, you risk getting hit with a 10% early withdrawal penalty.

The full original article, published in Investors Business Daily and written by Donald Jay Korn, can be found here <—–