How much will I get from the stimulus plan?

What about IRA's? I am 68 and my statements scare the doodles out of me. Our accountant says "NO" to cashing them in and paying off all debt because of tax penalties. But which is worse: seeing the falling balances or paying a tax penalty?
— Betty K., Colorado Springs. Colo.

The important question is: where are your IRA savings invested? If they’re in risky stocks, you may want to move them into something less risky like bonds that allow you to hang on to more of your doodles.

The problem is trying to decide whether to do that now — after the market has taken a big bite out of those stocks — or wait for your stocks to recover. And the answer to that is beyond the scope of this column. (We traded in our stock market crystal ball awhile back because it got stuck on “Up, Up and Away!!” after the Internet bubble.) As anyone learned who sold off after the market’s big plunge last tuesday, markets that drop sharply can just as suddenly go back up. In roughly 25 years of following the markets, though, we’ve yet to find anyone who can reliably pick market tops and bottoms. (If you do come across one, please let us know.)

There’s a case to be made that the sell-off may soon have run its course. But it’s also entirely possible that we face a prolonged downturn that won’t hit bottom until later this year or even next. The only honest answer is: no one knows.

Still, markets like this one offer a terrific reminder of how much risk you can tolerate. If your current holdings are too volatile for your comfort level, by all means think about shifting them to something calmer over the long haul.

On our yearly stock report there shows a loss of $700. Can we claim the loss on our income taxes? If so, what forms might we need?
— Sandra, Address withheld

A “loss” for tax purposes is not necessarily the same as what you or I might think of as an investment loss.

The taxable gain on an investment begins when you buy it, not when the year begins or when your stocks are up from one month to the next. You also don’t officially “lose” money until you sell the investment — even if your statement shows the value of your holdings have dropped since your last statement.

Tax gains are calculated using the purchase price (sometimes called the “basis”) and the sale price, which represents your proceeds. When you calculate your gains, you also get to deduct direct costs like trading fees and commissions from the sale price.

So if you bought stock or mutual fund shares for $500 five years ago, sold them for $1000 last week and paid brokerage fees of $25, your “gain” for tax purposes would be $1000 (the sale price), minus $500 (the purchase price, or “basis”), minus $25 in fees, which leaves you with a $475 capital gain.

If your $500 worth of stock rose to $1000 and then fell to $750, you would understandably feel like you’d “lost” $250. But the IRS doesn’t see it that way. Because you paid $500 for the shares, with the stock at $750, the tax man figures you’re still $250 ahead. So if you sold the investment, you’d owe tax on that $250 capital gain (minus your costs).

That means the only way to book a tax loss on an investment is to sell it for less than you put into it.

The form you use is called a 1040 Schedule D, on which you list all of your gains and losses for the year, and then subtract your losses from your gains to find out your total capital gains for the year. The one wrinkle is that you have to separate short-term gains and losses (investments you held for less than a year) from your long-term gains (hose held more than a year.)  That's because short term gains are taxed at a higher rate than long term gains.

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