Look On The Bright Side: Job And Market Losses Netted Me A $2500 Tax Refund

I finally got around to finishing up my taxes this weekend using TurboTax (yes, I’m one of those last-minute people).  The last year has been pretty bad for most people, economically, and I’m no exception.  I was laid off in October and suffered massive investment losses in my retirement portfolio just like everybody else.

As it turns out, Uncle Sam feels your pain.  I got a number of tax breaks this year related to my job loss and investment losses.  Here are just a few.

Write-Offs For Investment Losses

After being laid off, I sold most of my taxable stocks and mutual funds and added the proceeds to my emergency fund, just in case I needed them.  As it turns out, my timing was fortuitous because I avoided the November-March fiasco entirely.  My losses were still substantial, however, which turned out to be a big advantage at tax time.

• I was able to write off $3,000 in long-term capital losses against regular income – The IRS generously allows you to deduct up to $3,000 in long-term capital losses from your regular income.  This is one of the most generous tax loop-holes going, since regular income rates are higher than long-term capital gains rates.  I was able to deduct the full $3,000 which saved me almost $1,000.
• I received a tax-loss carry-forward for next year – Losses above the $3,000 limit can’t be written off on this year’s return, but you can carry them forward indefinitely.  For example, if you have $5,000 worth of losses, you can deduct $3,000 this year and $2,000 next year.  I’ve already saved a few hundred dollars on next year’s taxes!

Write-Offs Due To Unemployment

While unemployment insurance is taxable income in most cases, I didn’t receive any due to my severance package.  I did freelance work, though, in addition to my blogging business so I was able to claim a number of home office deductions.  The size of my home office was about 8% of my overall square footage, so I was able to deduct 7% of the following items.

• Utilities - gas, electricity, internet, etc
• Homeowners Association Dues
• Mortgage Interest
• Property Taxes
• Depreciation – I was able to deduct a few hundred dollars in depreciation this year due to the home office.  I will have to reclaim this when I sell (if I sell for a gain), but the current tax savings will more than offset that.

Overall, I’m getting approximately $2,500 back from the federal and state government due to a combination of these factors.  Sure, I lost money in the market but overall, I am actually in better financial shape today than when I was laid off:  my emergency fund is more than twice as large and I actually avoided some of the recent market losses completely by accident.  Now that my emergency fund is where I want it to be, I’m beginning to put money back into the market (in my ROTH IRA and taxable account as well).