November signals the end of the harvest: The leaves are down, the pumpkins are picked, and the New Year is right around the corner. Yes, November is the perfect time for investors to start pruning their year-end portfolios.

Why November? Because in November you are most likely to get the best price for all of those stocks you've been meaning to shed all year. Not to mention by the time December rolls around, most of your fellow investors will have already pruned the same dead weight out of their portfolio, leaving procrastinators with a lower-than-expected stock price. Here's how to harvest your losses and increase your returns while getting a tax break along the way.

When Was the Last Time You Returned a Refund?

Many smart investors simply resist the idea of selling a stock at a loss. I once even met an investor who bragged about not taking a loss in decades. That just doesn't make much sense to me when Uncle Sam allows investors to deduct the first $3,000 of net capital losses from their "ordinary wage-and-salary-income" (a.k.a. "Net" losses.) So, if you're paying taxes at a 35% rate, in effect, the government just issued you a refund for 35% refund for your loss!

Of course, the $3,000 limit—which hasn't been raised since 1978—keeps the tax benefit rather modest in any single year. However, what many investors don't realize that if they take a net loss of more than $3,000, they can carry over the excess into later years. Here's how it works.

Let's say you lost $9,000 in the stock market this year and had no gains in 2008 or 2009, you could deduct the entire amount lost over that three-year period. In short, harvesting losses now can increase your investment returns over the long haul by cutting your overall tax bill.

That's why it's so important to not let pride or what I like to call "financial inertia" prevent you from enjoying what could turn out to be a rather sizable and legitimate tax break.

Finding That Biggest Loser

Ok, so let's say you're now open to taking a loss strictly for tax purposes. The next challenge is to decide which stocks to sell. To make the most of your Capital Gains deduction, investors will want to find the biggest loser that's bumping right up against a price ceiling. Perhaps that sounds a bit unorthodox, but even losing investments stage the occasional "dead-cat bounce."

With the stock market up one day and down in the dumps the next, you don't want your biggest loser gaining any ground before you pull that trigger.

Don't Forget to Sell Your Mutual Fund Duds

While you're clearing out the deadwood from your stock portfolio, take a look at your mutual fund holdings too. Keep in mind, that during December, many funds will be declaring their annual capital gains distributions. If you own a fund that has slim chances of outperforming its peers in 2008, why hang on for the double punishment of a taxable distribution this year? Dump it and dump it now before we ring in the New Year.

The Time Has Come to Cut and Run!

The stock market is continuing to do what it does best—fool the vast majority on onlookers. As soon as the nation's mortgage mess broke this summer, gurus rushed to the airwaves to predict disaster for stocks. A mere 37 trading days later, the blue chip stock indexes were soaring to all-time highs. Then, after the Feds tried to revive the market on Halloween, the stock market got spooked and has been sliding to new depths ever since. This recent sell-off makes it the perfect time to unload those investments that have outworn their welcome. That makes November the perfect time to cut and run!

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