Tax Loss Harvesting in 2018

Our ability to help you reach your goals involves more than managing your investments and guiding you through challenging times. It encompasses many aspects of your financial situation, including tax management. While down markets are unwelcome, they provide opportunities to use trading strategies to add to after-tax returns.

We’ve explained tax loss harvesting in past newsletters. It’s worth revisiting because we harvested more in 2018 than in past years. It is important that you and/or your tax preparer understand the results.    

Tax loss harvesting is a strategy we employ in taxable accounts to lower your taxes. Note that IRAs and 401(k)s are not taxable accounts.

If an investment’s value is lower than its cost basis, we can sell the investment, realize a capital loss, and use the sale proceeds to buy a similar investment. The result is a similar investment profile plus a capital loss you can apply on that year’s tax return.

On your tax return, you add realized gains and capital gain distributions and subtract capital losses. The total leaves you in one of three categories:

1.       A year-end gain. Here, you will owe taxes. The federal tax code applies a lower tax rate to capital gains than to ordinary income. Most pay federal taxes of 15% on gains plus state taxes.

2.       A year-end loss between $0 and $3,000. You are annually allowed to offset up to $3,000 of ordinary income with capital losses. Because your personal income tax bracket is higher than your capital gains tax bracket, it’s beneficial to apply capital losses against ordinary income.

3.       A year-end loss > $3,000. After you use the $3,000 against ordinary income, any leftover losses can be banked for future tax returns. You will file a Tax Loss Carryforward to preserve these losses. In future years, you will apply the banked losses against capital gains.  

Tax loss harvesting is one way we can be constructive when confronted with a down market like in 2018.

Please let us know if you would like us to walk you through the harvesting we did in your taxable account. We also are able to communicate directly with your accountant if that would be helpful.