The upside of losses

Q: If I have a big loss when I sell some stock, I can deduct it on my tax return, right? — D.B., Evergreen, Colo.

A: Yup. No one likes money-losing investments, but at least they can shrink your tax bill. Here’s how it works: You first offset any capital gains from stock sales with your capital loss(es). Any remaining loss can be deducted from your income — up to $3,000 per year. Amounts exceeding that $3,000 can be carried over to the following year.

If you’re in, say, the 24 percent bracket and you deduct $3,000 from your income, that amount is excluded from taxation. So you save 24 percent of $3,000, or $720. Spend a little more time learning about tax rules and strategies, and you can probably save even more money. Start at Irs.gov or Fool.com/taxes.

Q:

How much personal liability insurance should I have? — T.W., Morgantown, W.VA.

A:

It depends on how much you have to lose if you’re sued. You want to prevent a lawsuit from causing you a financial catastrophe. Total the value of your home, belongings and financial assets. Add more for legal costs, though insurers sometimes cover those. Then check the liability coverage on your home and auto policies.

If your assets are considerable, consider getting an “umbrella” policy (from another insurance company, if necessary). Umbrella policies generally offer much more liability coverage — typically $1 million or more — and charge much lower premiums than homeowner’s and automobile insurance policies do.

Insurance may be boring, but it’s really important, protecting you from potential financial losses. You can keep insurance costs down by bundling policies with the same insurer and shopping around for the best prices every year or two.