by David Rae
The goal of tax-loss harvesting to lower your overall taxes. With proactive tax planning, you may be able to lower your taxable income by selling off losing investments. Similarly, you can offset some long term gains by selling investments that may have lost money over the long term. In this article, we will share with you what you need to know about tax-loss harvesting.
Buys Low Sell High?
The first lesson of investing is to buy low and sell high. This may be easier said than done in real life. Even within a portfolio that had done amazingly well, a few investments may have lost money. Or perhaps, just a few shares of an investment has lost money in the short term.
In the not so distant past Tax-loss harvesting was mostly reserved for the uber-wealthy. With new technology and the lowering of trading commissions, anyone with investment accounts can benefit from knowing about tax-loss harvesting. Saving money on taxes is saving money on taxes. Granted, the bigger your accounts or, the higher your income, the bigger the tax savings may be.Today In: Money
What is the Point of Tax-Loss Harvesting?
In plan English, tax-loss harvesting amounts to selling investments to minimize the taxes on your investment portfolio. In the simplest terms, this is more about taxes than investing.
When using tax-loss harvesting in real life, it is a bit more complicated than the description above. You can harvest short term losses as well as long term losses. Depending on your situation, one may be way more valuable than the other.
When we are tax-loss harvesting, we are selling certain shares of an investment at a loss to reduce taxes on the investment portfolio at the end of the year. You can use up to $3000 of short-term losses to offset regular income. If you are selling an investment with a long term capital loss, these losses can help offset the capital gains from other investments that have been sold for a profit.
Can I use tax-loss harvesting on my retirement accounts?
Buying and selling of investments within your retirement accounts are not taxable events. With that in mind, there is no need and no benefit from tax-loss-harvesting within a retirement account.
You will want to apply tax-loss harvesting only to your taxable investment accounts.
Example of Tax-Loss Harvesting
Let’s say that you have $100,000 in realized capital gains on certain index funds within your investment account. We have been in a bull market for over a decade, some of you are likely sitting on some huge capital gains. To minimize the tax liability from those gains, you sell other assets that will help generate a loss. If those losses total $50,000, they will cut your net capital gains taxes in half. With half the realized capital gains, you will have half the tax liability for these gains. We will dig a little deeper into how this actually works, a little later in this post.
Is Tax-loss Harvesting Really that simple?
Sadly, tax-loss harvesting is not all that simple in practice. When trying to do this manually- tax-loss harvesting can actually be quite complicated and labor-intensive. Back in the day, we had to do this tax planning process with excel spreadsheets. Blah. Now the process of tax planning is much easier, as much of the heavy lifting can be done with computers and software.
If your financial advisor is not idiot, they should…