As the year ends, many investors seek ways to keep more of their earnings. This is where an advisor's expertise can be valuable, and this month we want to highlight one particularly useful investment strategy to consider before December 31: tax-loss harvesting.
What is Tax Loss Harvesting?
Simply put, tax-loss harvesting uses investment losses to offset gains and lower your taxable income. This can help you keep more of your money invested for the future you’re building.
What Can Tax Loss Harvesting Do?
As we know, in any given year, some investments grow, while others decline. When you utilize tax loss harvesting to sell an investment that’s worth less than what you paid, that loss can be used to:
- Offset realized capital gains from other investments
- Reduce up to $3,000 of your ordinary income1
- Carry forward into future years for continued tax benefits
This can be helpful if you have gains from equity compensation, business events, or an active investment portfolio.
The Ins and Outs of Tax Loss Harvesting
Like any financial move, you’ll want to work with someone who understands the different facets of tax loss harvesting, to be sure they still suit your overall plan and goals. Here are some of the factors we monitor on behalf of our clients:
- Wash-sale rule: This is an IRS rule that means you can’t buy the same or ‘substantially similar’ investment within 30 days before or after selling, or the IRS won’t allow the loss.
- You can reinvest right away: You can still stay invested, if desired, by choosing a replacement investment that isn’t too similar.
- Short-term and long-term are treated differently: Losses first offset gains in their matching category. Keep in mind that reducing short-term gains is especially valuable because they’re taxed at higher rates than long-term gains.
- Losses carry forward: Any unused losses can reduce your taxes in future years.
- Stay aligned with your plan: Lastly, we keep our eye on clients’ long-term goals, so we don’t advise harvesting losses that would disrupt your long-term investment strategy.
Evaluate if Tax Loss Harvesting is Worth Considering During a Year-End Review
Year-end is an ideal time to pause and look at your financial picture. Small steps taken now can help you keep more of your income working toward your future. A year-end portfolio review helps you:
- See where your gains and losses stand
- Identify ways to lower taxes before December 31
- Refresh and rebalance your portfolio
- Utilize tax loss harvesting, if advantageous
- Keep more of your income working toward next year’s goals
We Can Help!
By combining CPA-level tax insight with ongoing financial planning, we help you view tax-loss harvesting as part of a broader financial plan. If you think tax-loss harvesting might help you lower your tax bill or reset your portfolio before the new year, we’re here to walk you through it.
1. IRS.gov